Alternative Investment Flashcards
Merger Arbitrage
simultaneously purchasing and selling the stocks of two merging companies to create riskless profits.
Relative value hedge fund strategies
relative valuation between two or more securities.
relative value strategies are exposed to credit and liquidity risks.
Opportunistic hedge fund
top-down approach, focus on a multi-asset opportunity set, and include global macro strategies and managed futures. The key sources of returns revolves around correctly discerning and capitalizing on trends in global markets. Mean-reverting low volatility markets will hurt the return.
Global macro
use both fundamental and technical analysis to value markets as well as discretionary and systematic modes of implementation.
Linear factor model
provide insights into the intrinsic characteristics and risks; can determine which risk a hedge fund is exposed to under abnormal market conditions.
Equity market-neutral
useful during non-trending or declining markets; does not take beta risks; must apply leverage to the long and short positions to achieve a meaning return; return profile: less steady and less volatile; more attractive than fixed income
Paths of volatility trading strategy - Exchange-traded options
- Exchange-traded options; option maturity <2 years; longer-dated options will have more absolute exposure to volatility; shorter-dated option has more delta sensitivity
Paths of volatility trading strategy - OTC options
The tenor and strike prices of the options can be customized. The tenor of expiry dates can be extended beyond what is available with exchange-traded options.
Paths of volatility trading strategy - VIX futures or options on VIX futures
Another way to express a volatility view without the need for constant delta hedging of equity put or call
Paths of volatility trading strategy - PUchase an OTC volatility swap or a variance swap
A volatility swap- forward contract on future realized price volatility
A variance swap - forward contract on future realized price variance.
Multi-strategy fund vs Fund of funds
MS: faster tactical asset allocation; more transparency and a better picture of the interaction of the different portfolio risk; can respond faster to real-time market impact; improved fee structure; higher leverage;
Hedge fund that has no lock-up period
Fund of funds.
Fixed-income relative value
valuation differences can result from differences in credit quality, liquidity and in volatility expectation. Realizing a net positive relative carry over time based on the shape of the yield curve.
Distressed securities
establish” capital structure arbitrage” positions: capturing credit, liquidity and volatility premiums due to inefficiencies in pricing between related securities.
Diversification benefits metrics
A higher mean return-to-volatility ratio implies greater efficiency with the risk we accept.
Negative correlation to a traditional long equity portfolio
Long volatility
Leverage usage of market neutral
As many beta risks are hedged away, higher levels of leverages are needed to achieve meaningful returns.
Embedded beta
Overall, long/short equity investing in most instances is a mix of extracting alpha on the long and short sides from single-name stock selection combined with some naturally net long embedded beta.
Liquidity of distressed securities
the return profile is at the higher end of event-driven strategies but with some variability.
Usually long-biased; subject to security-specific outcomes but still impacted by the health of the macroeconomy;
high level of illiquidity, especially using a concentrated activist approach; ultimate results are binary; either very good or very bad
Attractiveness: returns tend to be “lumpy” and cyclical; good when investing in early stages of economic recovery after a period of market dislocation;
Leverage usage of distressed securities
modest to low
Life Settlement
A third party that buys life insurance.. A hedge fund manager specialized in investing in life settlements would require to have actuarial knowledge.
Comparison of riks, liquidity, leverage, and Benchmarking of Fund of funds and Multi-strategy funds
Both offer steady, low-volatility returns; multi-strategy outperforms FOF but with more variance and higher leverage
MS offers faster tactical asset allocation and improved fee structure but with higher manager specific operational risks. FoFs offers a more diverse strategy mix but with less transparency and slower tactical reaction time.
Both groups have similar initial lock-up and redemption periods. But MS have investor-level or fund-level gates on maximum redemptions allowed per quarter
Leverage:
MS uses more leverage than FoF, thus more subject to left-tail blow-up risk in stress periods.; better strategy transparency and shorter tactical reaction time make MS a more resilient strategy than FoFs in preserving capital
FoF lock-up periods
requires an initial one-year lock-up period and then monthly or quarterly liquidity
stub trading
buying and selling stock of a parent company and its subsidiaries, typically weighted by the percentage ownership of the parent company in the subsidiaries.
multi-class trading
buying and selling different classes of shares of the same company, such as voting and non-voting shares
pairs trading
A pairs trade is a trading strategy that involves matching a long position with a short position in two stocks with a high correlation.
cash positions in short -biased strategies
Dedicated short sellers: They only trade with short-side exposure, although they may moderate short beta by also holding cash.
Short-biased managers: They are focused on good short-side stock picking, but they may moderate short beta with some value-oriented long exposure or index-oriented long exposure as well as cash.
soft catalyst event-driven
investment made proactively in anticipation of an event that has yet to occur
hard-catalyst event-driven
the investment made in reaction to an event
