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I devised a pair trading strategy going long XXX and short B*YYY. B is the quantity of shares of YYY I need to short.

The problem is I can’t go short on YYY, but there is an inverse ETF for YYY called ZZZ.

Assuming that ZZZ is a good replicator of shorting YYY, how should I calculate the quantities I should buy for XXX and ZZZ to imitate the long/short trade?

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  • $\begingroup$ What is your time horizon? Inverse ETFs get reset very often. $\endgroup$
    – dkhokhlov
    May 17, 2014 at 16:03
  • $\begingroup$ Can you trade options on YYY? You can then synthetically short YYY $\endgroup$
    – pyCthon
    Jun 30, 2016 at 23:08

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Hedginge/Adjusting would be with the Beta of the inverse ETF. Usually, Long/Short strategy would involve an ETF and a stock in which you would Beta adjust the ETF position.

You can use an ETF, I don't see anything wrong with this as long as their is some level of correlation between the Short and the Long. You want them to mean revert in a determined time horizon so correlation is important. Not too high or too low.

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