Relative Value

Relative value refers to the worth of an asset or security compared to another asset or a benchmark, rather than its absolute value. This concept is often used in fixed-income and hedge fund strategies to identify pricing inefficiencies between securities with similar characteristics. Investors who focus on relative value seek to exploit these inefficiencies by buying undervalued assets and selling overvalued ones, aiming for profits as the market corrects the price differences.

Example

A bond trader identifies a relative value opportunity by comparing two corporate bonds with similar maturities but different yields, choosing to buy the undervalued bond with a higher yield.