CH 20 Flashcards
Define what a ‘hedge fund’ is.
A private investment pool, open to wealthy or institutional investors, that is largely exempt from SEC regulation and therefore can pursue more speculative policies than mutual funds.
Define the ‘lock-up period’?
Period in which investors can’t redeem investments in the hedge fund.
What is a benefit to the ‘lock up period’?
The lock up period enables funds to invest in illiquid assets where returns may be higher, without worrying about meeting unanticipated demands for redemptions.
Define ‘directional strategy’.
Speculation that one market sector will outperform other sectors.
Define ‘non-directional strategy’?
A position designed to exploit temporary misalignments in relative pricing; typically involves a long position in one security hedged with a short position in a related security.
Define a ‘market neutral strategy’.
A strategy designed to exploit relative mis-pricing within a market , but which is hedged to avoid taking a stance on the direction of the broad market.
Define ‘pure plays’.
Bets on particular mis-pricing across who or more securities, with extraneous sources of risk such as general market exposure hedged away.
Define ‘statistical arbitrage’.
Use of quantitative systems to uncover many perceived misalignments new relative pricing and ensure profit by diversifying across these small bets.
Define ‘pairs trading’.
Stocks are paired up based on underlying similarities, and long-short positions are established to exploit any relative mis-pricing between each pair.
Define ‘data mining’.
Sorting through large amounts of historical data to uncover patterns that can be exploited.
Define ‘portable alpha or alpha transfer’.
A strategy in which you invest in positive alpha positions, then hedge the systematic risk of that investment, and, finally , establish market exposure where you want it using passive indexes.
Define ‘positive serial correlation’.
Positive returns are more likely to be followed by positive rather than negative returns.
Define ‘backfill bias’.
Bias in the average returns of a sample of funds induced by including past returns in funds that entered the sample only if they happened to be successful.
Define ‘survivorship bias’.
Bias in the average returns of a sample of funds induced by excluding past returns on funds that left the sample because they happened to be unsuccessful.
Define what is meant by “high water mark”.
The previous value of a portfolio that must be re-attained before a hedge fund can charge incentive fees
