ALT R19

Question 1

Hedge fund strategies

Answer 1

Equity Related
Event Driven
Relative Value
Oppostunistic
Specialist
Multi-Manager

Question 2

Types of Equity Related HFs

Answer 2

Long Short Equity - generate alpha through stock picking. Liquid, generally net long. The more market neutral, the more leverage is likely applied

Short only / Short Bias - Negative correlations to traditional assets and modest return goals. Focus is on stock picking with minimal leverage. Short only = 60-120%, Short Biased = 30-60%.

Equity Market Neutral - profit from mispricing in securities. Beta risk is minimal, quantitative, high leverage

Question 3

Types of Event Driven HFs

Answer 3

Merger Arbitrage - Insurance like with high sharpe ratio, but has left tail risk. Negative returns if merger fails, some use leverage, typically liquid

Distresed securities - Focus on bankruptcies or financial stress. Long bias with little liquidity. Low leverage, high return potential

Question 4

Types of Relative Value HFs

Answer 4

Fixed Income Arbitrage - profits from mispicing of bonds. Strategies include yield curve trades and carry trades, uses high leverage

Convertible Arbitrage - extract “underpriced” expected volatility from convertible bonds. Needs high convertible issuances, liquidity, moderate volatility. Typically 300% long, 200% short.

Question 5

Types of opportunistic HFs

Answer 5

Global Macro - uses discretionary approaches with a broad range of financial instruments to exploit global macro trends. Offer diversification in times of stress

Managed Futures - portion of futures portfolio is actively managed, provides diversification. Exhibits right tail skew suring market turmoil

Question 6

Types of Specialist HFs

Answer 6

Volatility traders - profit from changes in term structure of volatility. Uses OTC options to create option strategies

Life settlements - purchases pools of life insurance policies where the HF is the beneficiary. Looks for policies with low surrender value, low premiums and likelyhood of death for the insured.

Question 7

Types of Multi-Manager HFs

Answer 7

Fund of Funds - Invests in other HFs. Can suffer from lack of transparency, slow execution, netting risk

Multi-Strategy - a single HF pursues a combination of strategies all under one roof. Offers a better fee structure than FoF, but less diversified

Question 8

Factor models used to understand HF risk

Answer 8

Conditional linear factor are used to understand risk exposures.

Four Factor Model:
Equity risk
Currency Risk
Volatility Risk
Credit Risk