Alternative Investments 3 Flashcards
Hedge Funds
What are hedge funds and who can invest in them?
Hedge funds are private pooled investment vehicles available online, generally only to qualified or accredited investors.
In what asset classes do hedge funds typically invest?
Hedge funds invest in traditional asset classes like debt and equity, use leverage, and utilize derivatives to pursue their strategies.
How do hedge funds compare to mutual funds, REITs, and ETFs?
Unlike mutual funds, REITs, and ETFs, which are publicly traded, hedge funds are privately held.
How do hedge funds differ from private equity funds in terms of liquidity and time horizon?
Hedge funds invest mostly in liquid asset classes and have a shorter time horizon, with periodic redemptions, unlike private equity funds, which require a longer time horizon.
Hedge Fund Strategies
- Equity Hedge Fund Strategies
- Fundamental Long/Short
- Fundamental Growth
- Fundamental Value
- Market Neutral
- Short Bias - Event-driven Strategies
- Merger arbitrage
- Distressed/Restructuring
- Activist shareholder
- Special Situations - Relative Value Strategies
- Convertible Arbitrage Fixed Income
- Speci fc fixed income (ABS/MBS/high yield)
- General Fixed Income
- Mulitstrategy - Opportunistic strategies
- Macro strategies
- Managed Futures
Equity Hedge Fund Stratgies
seek to pro it from long or short positions in publicly traded equities and derivatives with equities as their underlying assets. Short positions taken to reduce or remove overall market risk can be in a market index if a manager does not have a negative opinion on speci fic securities. Subcategories include the following:
- Fundamental Long/Short
- Fundamental Growth
- Fundamental Value
- Market Neutral
- Short Bias
Fundamental long/short.
Use long positions in undervalued securities based on fundamental analysis while simultaneously having a short position in a
portfolio of stocks or an index. This strategy seeks to capture alpha when a market correction occurs. Most managers have net long exposure (i.e., a long bias).
Fundamental growth.
Use fundamental analysis to ind high-growth companies. Identify and buy equities of companies that are expected to sustain relatively high rates of capital appreciation, and short equities of companies expected to have low or no revenue growth. Typically, these funds have a net long bias.
Fundamental value.
Buy equity shares that are believed to be undervalued, and short equities believed to be overvalued, based on fundamental analysis. The performance of value stocks relative to growth stocks drives performance.
Market neutral.
Use technical or fundamental analysis to select undervalued equities to be held long and to select overvalued equities to be sold short, in approximately equal amounts to pro it from their relative price movements without exposure to market risk. Leverage may be used.
Short bias
Employ technical, quantitative, and fundamental analysis and take predominantly short positions in overvalued equities, possibly with smaller long positions but with negative market exposure overall. This is a contrarian strategy that focuses on the manager’s skills at discerning lawed business strategies or accounting.
Event Driven Strategies
are typically based on a corporate restructuring or acquisition that creates pro it opportunities for long or short positions in common equity, preferred equity, or debt of a specif ic corporation. Event-driven funds are typically long biased. Subcategories are as follows:
- Merger arbitrage
- Distressed/Restructuring
- Activist shareholder
- Special Situations
Merger arbitrage
Buy the shares of a f irm being acquired and sell short the f irm making the acquisition. Although the term arbitrage is used, such a strategy is not risk free because deal terms may change or an announced merger may not take place.
Distressed/restructuring.
Buy the securities of f irms in f inancial distress when analysis indicates that value will be increased by a successful restructuring, and possibly short overvalued securities at the same time.
Activist shareholder.
Buy suff icient equity shares to inf luence a company’s policies, with the goal of increasing company value (e.g., by restructuring, change in strategy or management, or return of capital to equity holders).
Special situations.
Invest in the securities of firms that are issuing or repurchasing securities, spinning off divisions, selling assets, or distributing capital.
Relative value strategies
involve buying a security and selling short a related security, with the goal of pro iting when a perceived pricing discrepancy between the two is resolved. Subcategories include the following:
- Convertible Arbitrage Fixed Income
- Specifc fixed income (ABS/MBS/high yield)
- General Fixed Income
- Mulitstrategy
Convertible arbitrage fixed income.
Exploit pricing discrepancies between convertible bonds and the common stock of the issuing companies and options on the common shares.
Speci fic f ixed income (ABS/MBS/high yield).
Exploit pricing and quality discrepancies.
General fixed income.
Exploit pricing discrepancies among f ixed-income securities of various issuers and types.
Multistrategy.
Exploit pricing discrepancies among securities within and across asset classes and markets.
Opportunistic strategies
focus on macro events and commodity trading. Often, these strategies are implemented using ETFs or derivatives in addition to individual securities. Subcategories include the following:
– Macro strategies
– Managed futures
Macro strategies
Macro strategies are based on global economic trends and events and may involve long or short positions in equities, fixed income, currencies, or commodities. These funds bene it from heightened volatility surrounding major events. Smoothing of economic shocks by central bank actions reduce the attractiveness of these strategies.
Managed futures
Managed futures funds may focus on trading commodity futures (these funds are known as commodity trading advisers, or CTAs) or incorporate f inancial futures. Commodity prices tend to behave differently than f inancial assets, in that high prices tend to decrease demand (which in turn decreases prices), while low prices reduce supply (which in turn increases prices).