I made this "game" up on the fly, with no cannned solution, so don't expect too much. In fact, there really is no "solution" as such. Thursday's solution might not be today's.
First a couple of disclaimers. I'm no authority on this paired long-short hedging technique, though I've dabbled with it. A few years ago I made a few dollars going long XMSR and short SIRI, but that certainly doesn't make me an expert.
Second, I am currently long both SRX and MLS. In fact I bought more of both late last week. I am certainly not a member of the market-neutral trading world.
You criticized my not allowing options and I responded to that. Perhaps a bigger criticism would be the equal-dollars-of-each limitation. A better approach is to adjust the purchases for beta to be market neutral. That is, if one company has a beta of 1.0 and the other 1.2, one really ought to commit to 120% of the first, whether long or short, to be market neutral. (Frankly, I haven't even looked up the beta on these two companies and won't since I also think it's voodoo in most respects, again for reasons that I won't describe here.)
My knowledge of these two companies is fairly limited (as all can tell). My philosphy is that there are always investors who know a lot more about every company than I do (not just insiders, though certainly do, but that is another subject). My style is to invest in companies that have major problems (accounting screw-ups, FDA sanctions, bankruptcy for whatever, etc.) so my focus is on the screw-up and not all the other fundamentals. The market is fairly efficient on the other stuff and I could work 36 hours per day and not gain an edge.
So I picked SRZ and MLS for this little game, not because they are similar in every respect, but because they are likely to show high continuing volatility and have some common problems. Somebody said one's a REIT and the other is not, so that makes them apples and oranges. To that I can only respond, "Gimme a break." They mostly face the same fundamental issues (e.g., interest-rate sensitivity) and the same equity market exposure. Pairing hedges are seldom as perfect as XMSR and SIRI.
So what's the "solution"? Buy MLS and short SRZ as part of an overall portfolio strategy that requires market neutrality and has lots of other such pairings.
That doesn't mean I dislike SRZ (remember, I'm long). Based on what I've determined, SRZ is the better company with the superior management (at least, less suspect) and fewer problems.
But MLS has been beaten down more (with good reason) and is far more likely to respond to the upside (less to the downside), near term, to future events (e.g., a buy out). If both companies appreciate over the next month or so, I would expect MLS to beat SRZ. More money would be made on the long than lost on the short. And that's what hedging is all about.
Again, all this could change with one day of trading, or one headline.
I'm sure others with more knowlegde of such things can criticize all of the above. Have at it.
Bart, I could write more. But, as you know, I'm lazy.