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26-1 hedge fund strategies (3 equity strategies (equity market neutral …
26-1 hedge fund strategies
1 introduction
2 classification
of hedge funds
and strategies
the most
important
characteristics
legal / regulatory
overview
min income or net-worth requirement
subject ot regulatory oversight against fraudulent conduct
overall regulatory constraints far less than regulated vehicles
flexible mandates -
few investment constraints
in terms of investable asset classed and
securites, risk exposures and collateral
large investment universe
access to a wide range outside the
normal set of traditional investment
aggressive investment styles
flexible deemed too risky
relatively liberal use of leverage
either by borrowing securities or
using implied leverage via derivatives
hedge fund liquidity constraints
initial lock-up periods /
liquidity gates / exit windows
relatively high fee structures
management fees and incentive fees
classification
single-manager fund /
multi-manager fund ( fund-of-funds)
hedge fund
research - HFR
six main single
strategy groupings
equity hedge
event driven
fund-of-funds
macro
relative value
risk parity
CFA - six
categories
hedge fund
strategy
equity-related
equity-oriented
risk
event-driven
event risk
relative value
often exposed to credit and liquity risks
opportunistic
the risks vary across time and asset classes
specialist
exposed to unique risks
multi-manager
3 equity
strategies
long /
short
equity
the objective: to be flexible finding attractive opportunities on both long and short sides of the market and to size time within a portfolio
can shift between industry sectors, factors and geographic regions
investment
characteristics
typically hold net long equity positons
generally to find more sources of idiosyncratic alpha ( via stock picking and secondarily by market timning) rather than embedded systematic beta
strategy
implementation
the market exposure - the net of the beta-adjusted long and short exposures
a mix of extracting alpha on the long and short sides from single-name stock selection combined with some naturally net long embedded beta
dedicated
short
selling
and
short-
biased
types
short-biased -
less extreme version
activest shorting selling -
take short position and publicly present research backing the short thesis
dedicated short -
selling take short-only positions
investment
characteristics
focus on overlvalued equities facing deteriorating fundamentals
attempt to max return during market declines
provide nagatively correlated returns comparesd to other strategy
short selling is a difficult in terms of risk management
manay countries limit or impose stringent rules on short selling
successful short-selling managers:
a short-term attack and retreat style
increasing positive return as marekt declines and risk-free return when market rises
target
company
overvalued - declining revenues and/or earning / internal management conflicts, weak governance or even potential accounting frauds
single product will ultimately unsuccessful or non-repeatable
strategy
implementation
typically take a bottom-up approach
single name credit default swap spreads, corporate bond yield spreads and / or implied volatility of exchange-traded put options
traditional technical analysis and / or pattern recognition techniques
short sellers serve as resource in creating more overall price efficientcy in the market
equity market
neutral
-EMN
take opposite position in similar or related equiites that divergent valuations
attempt to maintain a near net zero exposure to the market
set the betas fro sectors or industries
as well as common ris factors - market size / PE / PB
typically must apply leverage
often constructed using highly quantittive methodologies
more diverse
modified and adjusted over shorter time horizons
the overall goal - to capture alpha while min portfolio beta exposures
types
pairs tradings
positions established when unusually divergent spread pricing
attempting to min overall beta exposure
may still have effective short volatility tail risk exposure
stub trading
stock of a parent company and its subsidiaries
multi-class trading
different classes of shares of the same company
to gain on change in relative pricing
investment
characteristics
generally more useful for portfolio allocation during periods of non-trending or declining markets
a key strategy risk - leverage risk
the use of significant leverage may cause forced portfolio downsizing
EMN
manager
main source of skill is in security selection
secondary is market timing
market-neutral tactical asset allocators / macro-oriented market-neutral managers:
overall beta neutral and specialize in sector rotation exposure as their source of alpha
strategy
implementation
constructed in
four main steps
1 evaluated tradable securities
2 analyzed opportunities using fundamental models
3 portfolio constructed with constraints to maintain market risk neutrality
considered availability and cost of leverage
4 event-driven strategies
5 relative value strategies
6 opportunistic strategies
7 specialist strategies trading in niche markets
8 multi-manager strategies
9 analysis of hedge fund strategies
a conditional linear factor model
10 portfolio contribution of hedge fund strategies