Alternatives

Question 1

Netting Risk

Answer 1

if you have to pay performance fees to an underlying fund of an FoF, even if the overall FoF doesnt perform well

multistrats are more likely to absorb this internally, so not as much of a risk for investors for multistrats

Question 2

Carry Trade

Answer 2

Carry trades involve going long a higher-yielding security and shorting a lower-yielding security with the expectation of receiving the positive carry and of profiting on long and short sides of the trade when the temporary relative mispricing reverts to normal. A classic example of a fixed-income arbitrage trade involves buying lower-liquidity, off-the-run government securities and selling higher-liquidity, duration-matched, on-the-run government securities. Interest rate and credit risks are hedged because long and short positions have the same duration and credit exposure. So, the key concern is liquidity risk. Under normal conditions, as time passes, the more (less) expensive on-the-run (off-the-run) securities will decrease (increase) in price as the current on-the-runs are replaced by a more liquid issue of new on-the-run bonds that then become off-the-run bonds.

Question 3

Yield Curve Trade

Answer 3

For yield curve trades, the prevalent calendar spread strategy involves taking long and short positions at different points on the yield curve where the relative mispricing of securities offers the best opportunities, such as in a curve flattening or steepening, to profit. Perceptions and forecasts of macroeconomic conditions are the backdrop for these types of trades. The positions can be in fixed-income securities of the same issuer; in that case, most credit and liquidity risks would likely be hedged, making interest rate risk the main concern. Alternatively, longs and shorts can be taken in the securities of different issuers—but typically ones operating in the same industry or sector. In this case, differences in credit quality, liquidity, volatility, and issue-specific characteristics would likely drive the relative mispricing. In either case, the hedge fund manager aims to profit as the mispricing reverses (mean reversion occurs) and the longs rise and shorts fall in value within the targeted time frame.

Question 4

Long/Short Credit Trade

Answer 4

In a long/short credit trade, valuation differences result from differences in credit quality—for example, investment-grade versus non-investment-grade securities. It involves the relative credit risks across different security issuers and tends to be naturally more volatile than the exploitation of small pricing differences within sovereign debt alone.

Question 5

Event-Driven Hedge Funds

Answer 5

Question 6

Relative Value Hedge Funds

Answer 6

Question 7

Opportunistic Hedge Fund Strategies

Answer 7

Question 8

Specialist HF Strategies

Answer 8

Question 9

Multi-Manager HF Strategies

Answer 9

Question 10

Factors to Consider in Monitoring PE (and I guess HFs too)

Answer 10

• Key person risk
• alignment of interests
• Style Drift
• Risk management (philosophy + processes)
• Client / asset turnover (are people leaving the fund?)
• Client profile (similar clients?)
• Service providers