What Is a Time Arbitrage?

Time arbitrage is an investment strategy that takes advantage of pricing differentials created by investors operating on different time scales. In a simple example, someone with a long term strategy looking to build a portfolio that performs over a 20 year period may be able to pick up securities at a bargain from investors operating in the short term. Investors looking for immediate returns may quickly sell securities upon receiving bad news, allowing investors with a more lengthy outlook to snap them up at lower prices. This approach requires familiarity with investments and markets, as well as patience.

Arbitrage in general involves the exploitation of differing prices created by various market forces, allowing people to quickly buy and sell securities to realize profits. Someone might, for instance, buy in a low market and sell in a high one when wheat is selling at very low prices in the United States and very high ones in Germany. Time arbitrage involves the application of similar principles, using time as a scale.

Short-term investors tend to buy on good news and sell when bad news hits the headlines, because both can have an immediate impact on stock prices. Medium-term investors, on the other hand, may have a strategy that involves holding stocks to ride out price fluctuations. The long-term investor using time arbitrage looks at performance over time and has an interest in good average performance over a period of years, not months. Thus, if investments drop radically in value over a brief period, the investor can still hold the portfolio, waiting for it to recover.

This is not as simple as a buy and hold strategy. People who make use of time arbitrage need to perform substantial research to decide what to buy, and use analysis to manage their portfolios. The tactic does mean they do not respond immediately to market events to unload or pick up securities in the interest of short term returns. At times, such investors may seem to move against the market, because their projections suggest that a recovery will occur in time to bring the overall value of the portfolio back up.

Clear rules help with time arbitrage. An investor can decide on the time period for investment, and the desired overall returns. This information can guide research and analysis as well as investing decisions over time. If, for instance, the goal is eight percent returns each year on average, a year with a ten percent loss is not necessarily cause for immediate panic, given the way the portfolio may perform in the long term.