Alternative Investments Flashcards
What are the 6 classifications of hedge fund strategies?
Equity-related hedge fund strategies
Event-driven hedge fund strategies
Relative value hedge fund strategies
Opportunistic hedge fund strategies
Specialist hedge fund strategies
Multi-manager hedge fund strategies
What policies will a hedge fund manager look for when implementing a life settlement strategy?
Low surrender value being offered to the insured individual
Low ongoing premium payments required of the investor
High probability that the insured person will die sooner than predicted by actuarial methods.
What is an advantage of a multi-strategy manager fund compared to a FoF?
Can reallocate capital into different strategy areas more quickly and efficiently than would be possible by the FoF manager.
Full transparency and a better picture of the interactions of the different teams’ portfolio risks than would ever be possible for the FoF manager to achieve
More attractive fee structure
FoF suffer from netting risk (paying performance fees on winning funds, while suffering drag on losing funds)
What is an advantage of a FoF compared with a multi-strategy manager fund?
More diverse mix of strategies available leading to higher diversification and lower variance
Due diligence expertise
Lower operational risk
Less use of leverage
What factors are used in the conditional factor risk model?
Equity risk, interest rate risk, currency risk, commodity risk, credit risk, volatility risk
In a conditional factor risk model, what are the three sources attributable to unexplained risk?
Alpha (hedge fund manager’s skills), omitted factors and random errors.
What is the difference between dedicated short-selling, short-biased, and activist short selling strategies?
Dedicated short-selling only take short positions.
Short-biased still look for short opportunities but balance this with long exposure.
Activist short selling publicly announce their position
What is a relative value volatility arbitrage strategy?
To source and buy cheap volatility and sell more expensive volatility while netting out the time decay aspects normally associated with options portfolios. Depending on the instruments used (e.g., puts and calls or variance swaps), these strategies may also attempt to extract value from active gamma trading adjustments when markets move.
What are the key characteristics of hedge fund strategies?
Low regulatory oversight
Flexible mandates
Large investment universe
Aggressive investment styles
Liberal use of leverage
Liquidity constraints
High fee structures aligned with investors
What is a limitation of the risk factor-based approach?
Implementation hurdles are a limitation of risk-based approaches.
While the risk-based approach explicitly defines target exposures to different quantitative risk factors (such as equity, duration, and credit spreads), it is not explicit as to how these target risk factor exposures are best achieved using the asset classes available to the manager.
The actual implementation of the strategy will need to consider other issues, such as liquidity, external manager selection, and rebalancing, all of which may be hurdles in implementing a successful risk-based approach.
What is a limitation of a traditional based risk approach?
Ambiguous primary drivers of risk
Overestimation of diversification
