Identifying Relative Value Strategy in Hedge Funds

Very Hard Hedge Fund Strategies Relative Value

As an investment analyst focused on alternative investments, you have been tasked with evaluating a hedge fund that employs a relative value strategy. This strategy seeks to exploit pricing inefficiencies between related financial instruments. The hedge fund manager has outlined their investment approach, which includes positions in convertible bonds, credit default swaps, and equity pairs trading.

Your task is to identify which of the following scenarios best represents a relative value strategy within the context of this hedge fund's investment approach.

The fund takes a long position in a convertible bond while simultaneously shorting the underlying equity to capture the spread between the bond's price and the implied conversion value.

The fund makes a directional bet on the general market, buying multiple equities in anticipation of a bullish market trend.

The fund engages in a merger arbitrage by buying shares of a target company and selling shares of the acquiring company to capitalize on the spread between their current valuations.

Hint

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