Chapter 19-20 Alternative Investments

Question 1

Activist short selling

Answer 1

A hedge fund strategy in which the manager takes a short position in a given security and then publicly presents his/her research backing the short thesis.

Question 2

Back-fill bias

Answer 2

The distortion in index or peer group data which results when returns are reported to a database only after they are known to be good returns.

Question 3

Cross-sectional momentum

Answer 3

A managed futures trend following strategy implemented with a cross-section of assets (within an asset class) by going long those that are rising in price the most and by shorting those that are falling the most. This approach generally results in holding a net zero (market-neutral) position and works well when a market’s out- or underperformance is a reliable[predictor of its future performance

Question 4

Dedicated short-selling

Answer 4

A hedge fund strategy in which the manager takes short-only positions in equities deemed to be expensively priced versus their deteriorating fundamental situations. Short exposures may vary only in terms of portfolio sizing by, at times, holding higher levels of cash.

Question 5

Fulcrum securities

Answer 5

Partially-in-the-money claims (not expected to be repaid in full) whose holders end up owning the reorganized company in a corporate reorganization situation.

Question 6

Fund-of-funds

Answer 6

A fund of hedge funds in which the fund-of-funds manager allocates capital to separate, underlying hedge funds (e.g., single manager and/or multi-manager funds) that themselves run a range of different strategies.

Question 7

Hard-catalyst event-driven approach

Answer 7

An event-driven approach in which investments are made in reaction to an already announced corporate event (mergers and acquisitions, bankruptcies, share issuances, buybacks, capital restructurings, re-organizations, accounting changes) in which security prices related to the event have yet to fully converge.

Question 8

Life settlement

Answer 8

The sale of a life insurance contract to a third party. The valuation of a life settlement typically requires detailed biometric analysis of the individual policyholder and an understanding of actuarial analysis.

Question 9

Multi-class trading

Answer 9

An equity market-neutral strategy that capitalizes on misalignment in prices and involves buying and selling different classes of shares of the same company, such as voting and non-voting shares.

Question 10

Multi-manager fund

Answer 10

Can be of two types, one is a multi-strategy fund in which teams of portfolio managers trade and invest in multiple different strategies within the same fund; the second type is fund of hedge funds (or fund-of-funds) in which the manager allocates capital to separate, underlying hedge funds that themselves run a range of different strategies.

Question 11

Multi-strategy fund

Answer 11

A fund in which teams of portfolio managers trade and invest in multiple different strategies within the same fund.

Question 12

Pairs trading

Answer 12

An equity market-neutral strategy that capitalizes on the misalignment in prices of pairs of similar under- and overvalued equities. The expectation is the differential valuations or trading relationships will revert to their long-term mean values or their fundamentally-correct trading relationships, with the long position rising and the short position declining in value

Question 13

Quantitative market-neutral

Answer 13

An approach to building market-neutral portfolios in which large numbers of securities are traded and positions are adjusted on a daily or even an hourly basis using algorithm-based models.

Question 14

Relative value volatility arbitrage

Answer 14

A volatility trading strategy that aims to source and buy cheap volatility and sell more expensive volatility while netting out the time decay aspects normally associated with options portfolios.

Question 15

Short-biased

Answer 15

A hedge fund strategy in which the manager uses a less extreme version of dedicated short-selling. It involves searching for opportunities to sell expensively priced equities, but short exposure may be balanced with some modest value-oriented, or index-oriented, long exposure.

Question 16

Single-manager fund

Answer 16

A fund in which one portfolio manager or team of portfolio managers invests in one strategy or style.

Question 17

Soft-catalyst event-driven approach

Answer 17

An event-driven approach in which investments are made proactively in anticipation of a corporate event (mergers and acquisitions, bankruptcies, share issuances, buybacks, capital restructurings, re-organizations, accounting changes) that has yet to occur.

Question 18

Stub trading

Answer 18

An equity market-neutral strategy that capitalizes on misalignment in prices and entails buying and selling stock of a parent company and its subsidiaries, typically weighted by the percentage ownership of the parent company in the subsidiaries.

Question 19

Survivorship bias

Answer 19

Bias that arises in a data series when managers with poor track records exit the business and are dropped from the database whereas managers with good records remain; when a data series of a given date reflects only entities that have survived to that date.

Question 20

Time-series momentum

Answer 20

A managed futures trend following strategy in which managers go long assets that are rising in price and go short assets that are falling in price. The manager trades on an absolute basis, so be net long or net short depending on the current price trend of an asset. This approach works best when an asset’s own past returns are a good predictor of its future returns.

Question 21

Unsmoothing

Answer 21

An adjustment to the reported return series if serial correlation is detected. Various approaches are available to unsmooth a return series.