Equity Hedge Funds Flashcards
What is the overall strategy of equity hedge funds based on?
Establishing a long position on undervalued securities and short position on overvalued securities
What determines the market risk or systematic risk exposure for the equity long/ short funds?
The mix of long/ short positions
What are the common equity long/ short strategies?
- 130/ 30 funds (net long exposure to market risk);
- Equity market neutral funds (eliminte exposure to market or have portolfio Beta 0);
- Short Bias funds (higher % of short positions with a view to seeking profits in a market decline)
- Equity Market Neutral*
- A hedge fund strategy that seeks to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc. This strategy creates a hedge against market factors.*
What are the 3 sources of return for Equity Hedge Funds?
- Providing Liquidity. Liquidity is the degee to which securities can be bought or sold without sginificantly changing their prices;
- Using Factor analysis, Use models like Fama-French or CAPM
- Providing informational efficiency, securities that are difficult to analyze provide a complexiry premium
What are market anomalies?
They are observed patterns that represent violations of the efficient market hypothesis..
What are the common anomalies that can be used to derive alpha potential predictors of ex-ante alpha for Equity Hedge Funds
- Accountign accriuals;
- Price Momentum;
- Earnings momentum;
- Net stock issuance;
- Insider Trading
What is the Fundamental Law of Active Management (FLOAM)?
Information Ratio, the key to Active Management, depends on both skill and Breadth.
IR = IC X SQ-ROOT OF BREADTH,
IC= Corr. (Forecast Returns, Actual Returns),
BR = No. of independent Active Bets per year.
What are non-active bets?
They are bets designed to reduce tracking error rather than increase returns.
