Hedge Fund strategies Flashcards
single-manager fund
a fund in which one portfolio manager or team of portfolio managers invests in one strategy or style
(1) Equity related
(2) Relative value
(3) Event driven
(4) Oppotunistic
(5) Specialist
multi-manager fund
portfolio managers trade and invest in multiple different strategies within the same fund.
Definition of fund-of-funds
a fund 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
Equity-related hedge fund strategies
focus primarily on the equity markets, and the majority of their risk profiles involve equity oriented risk
(1) Long/Short equity
(2) Dedicated short selling / short bias
(3) Equity market neutral
Event-driven hedge fund strategies
focus on corporate events, such as governance events, mergers and acquisitions, bankruptcy, and other key events for corporations
(1) Merger Arbitrage
(2) Distressed securities
Relative value hedge fund strategies
focus on the relative valuation between two or more securities
Opportunistic hedge fund strategies
take a top-down approach, focusing on a multi-asset (often macro-oriented) opportunity set
(1) Macro
(2) Volatility trading
Specialist hedge fund strategies
focus on special or niche opportunities that often require a specialized skill or knowledge of a specific market
Type:
+ Volatility trading
+ Reinsurance/Life Settlement
Multi-manager hedge fund strategies (what focus on ?)
focus on building a portfolio of diversified hedge fund strategies
DISTRESSED SECURITIES strategy
focus on firms that either are in bankruptcy, facing:
+ potential bankruptcy
+ under financial stress
fulcrum securities
fulcrum: đòn bẩy
(1) the most senior security that, after undergoing restructuring, has the greatest likelihood of conversion into equity ownership
(2) The fulcrum security (or fulcrum debt) is one of the most essential concepts to understand in the context of corporate restructuring.
take positions as directional
use fundamental to determine over/undervalue
take positions as thematic
so sánh giá của 2 securities để long-short
TSM
time series momentum: -> trend following
+ buy securities have been rising in price
+ sell securities have been falling in price
6 hedge fund key features
(1) Legal/ regulatory
* accredited investors only
* Liquid
(2) Flexible mandate -> few constraints (NDT cang chuyen nghiep -> cang it phai nop report)
(3) Large Investment Universe
(4) Aggressive Investment Style
(5) Relatively Liberal use of leverage
(6) Liquidity constraints
(7) Relatively high fee structure
6 hedge fund strategies
(1) Equity related
(2) Event drivent
(3) Relative value
(4) Oppotunistic
(5) Specialist
(6) Multi-manager
what is equity related strategies
+ focus on stocks
+ major risk: equity risk
(1) L/S
(2) Dedicated short/ short bias
(3) equity market neutral
what is event - driven strategies
+ Strategy related to corporate actions (M&A, bankruptcy…)
+ Major risk: event risk
what is relative value strategy
seek profit from valuation differences btw sectors
Risk:
+ credit risk
+ liquidity risk
Type:
+ Fixed income arbitrage
+ Convertible bond Arbitrage
what is oppotunistic strategy
top-down approach, focus on a multi-asset (often macro oriented) oppotunity set
(1) macro trading
(2) manage future
specialist strategy
focus on special or niche oppotunities-> require specialized skill /knowledge
(1) manage future
(2) global macro
Multi manager strategies
focus on building a port. of diversified HF strategies
(1) creating one’s own mix of manager
(2) fund-of-funds
(3) multi-strategy funds
Type:
(1) Volatility trading
(2) Reinsurance/ Life settlement
3 strategies in equity related hedge fund strategiesch
(1) Long/short Equity
(2) Dedicated short selling & short - biased
(3) Equity market neutral
characteristics of L/S Equity
- Strategy implementation:
+ long underprice & short overprice
+ sector specific focus - investment characteristics:
+ market exposure of portfolio
+ 40% - 60% net long
+ arachive return to compare to long-only, but half amount std deviation - Role:
+ source alpha, also benefit from moderate long exposure
+ high fee -> archive comparable beta
characteristics of dedicated short selling & short bias
- Definition:
+ determince overprice -> short
+ Dedicated short selling:- pure shot
- 60% - 120% shot
+ Short - biased: - net short exposure
- 30% - 60% net short
- activist short selling
- Strategy implementation:
+ Bottom up approach: identify company:- unprofitable biz model
- bad management
- too much debt
- deceiful accounting
+ hold cash to temper (dieu chinh) short exposure
+ little leverage
- Investment characteristics:
+ negative correlation with conventional securities
+ lower expected return - Role in portfolio:
+ return uncorrelated with conventional securities
+ unreliable & relatively low expected return
Equity market neutral
- Definition: seek to attain near - zero to exposure to the market
- Strategy implementation
+ Long undervalue & short overvalue
+ Building portfolio:- Discretionary approach
- Quantitative approach
+ Subtypes: - Pair trading: long-short stock similar but misprice
- Stub trading: long-short stock of parent company & its subsidiaries
- Multi-class trading: L/S different share classes of the same firm
+ may use derivatives instrument to archieve zero beta
+ Often employ massive leverage
- Investment characteristics:
+ generate alpha
+ diversification
+ low volatility - Role in a portfolio:
+ Produce alpha without market beta risk
+ value when market volatility & poorly
+ less volatile
definition of event-driven hedge fund strategies
+ profit from outcome of corporate event: bankruptcy, M&A, restructuring
+ main risk: event risk
+ approach:
* solf catalyst event-driven approach
* hard catalyst event-driven approach
soft catalyst event-driven approach
investment made before event announce
hard catalyst event-driven approach
approach when investment made after event announce
event driven hedge fund strategies sub types
+ Merge arbitrage
+ Disstressed securities
characteristics of merge arbitrage
- Strategy implementation:
+ Most common: expect successful deal | Less common: expect failure deal
+ high leverage: 300% - 500%
+ involve cross border -> more risky - Investment characteristics:
+ left tail risk when outcome is not expected
+ more liquid to typical HF strategies - Role:
+ high Sharpe ratio
+ significant left-tail risk
characteristic of disstressed securities strategy
- Definition: take position on firm in financial distress (firm bankruptcy, near bankruptcy) -> to liquidate/reorganize
- strategy implement:
+ Form: passive/active
+ require particular broad range of skill to navigate various legal aspects
+ take a long of investment
+ low leverage - investment characteristic:
+ large return - larger variance of outcome
+ long lockup periods (often 2 years) - Role:
+ return higher
+ unpredictable & sensitive to market
+ high level of illiquidity
relative value hedge fund strategies definition
+ exploit valuation differences between securities
+ if sucess, earn various premium:
* liquidity premium
* credit premium
* volatility premium
2 types of ralative value HF strategies
(1) FI arbitrage
(2) convertible bond arbitrage
characteristics of FI arbitrage
- Strategy implementation:
+ Yield curve trades:- YC steppen/flatten
- Risk: interest rate risk, liquidity risk, credit risk
+ Carry trades: - short low/ long high
- Investment characteristic:
+ return relative small -> leverage should use
+ liquidity: depend on strategy + type of FI - Role:
+ return distribution similar to writing puts
+ high volatility due to high level of leverage
characteristics of convertible bond arbitrage
- Strategy implementation:
+ option within CBs exhibit low implied vol
+ hedge out the delta and gamma risk - Investment characteristic:
+ short selling the underlying equity
+ complex niche products (SP phuc tap) - Role:
+ perform best during normal market conditions- liquidity is available
- vol is modest
- good CBs being issued
+ not perform well in periods of illiquidity & weak credit
+
oppotunistic HF strategies definition
+ Top-down approach: global basis across regions,sector, and asset class
+ return are impact by:
* market cycles
* global development
* international interactions
+ technique:
* technique analysis
* fundamental analysis
+ modes of implementation:
* systematic
* discretionary
2 types of Opptunistic HF strategies
(1) Global macro: focus on global relationships across a wide range of asset classes and investment instruments
(2) Manage futures: is a hedge fund strategy that focuses on investments using futures, options on futures, and sometimes forwards and swaps (primarily on stock and fixed-income indexes) and commodities and currencies
characteristic of global macro HF strategy
- Definition:
+ make forcast of various global economics variables
+ use broad range of security types and global asset classes
characteristics of manage future
- Definition: take long/short position various derivatives contracts
- Strategy implementation:
+ Method: TSM, CSM
+ Signal triggers to enter a trade: vol, momentum
+ Size of position based on: correlation, volatility
+ Rules for closing position:- price targer
- momentum reversal
- time-based
- trailing stop-loss
- combination
+ use systematic approach
- Investment characteristics:
+ Leverage: highly
+ Liquidity: extreme
+ Other: crowding effect - Role:
+ little correlation with traditional secs -> improve risk adjusted return
+ during market stress: positive right tail skew -> diversified benefit
CSM
cross sectional momentum
+ carry out in particular asset class
+ long rising fastest asset, short falling sercurities.
Eg:
+ Long two metals futures with the best performance
+ Short position in the two metals contracts with the worst performance
definition of specialist HF strategy
use knowledge of a particular market to pursuit niche investment oppotunities
2 types of specialist HF strategies
(1) Vol trading
(2) reinsurance/ life settlement
definition of vol trading strategy
- How:
+ exploit differences in vol pricing
+ Long vol seekers - VIX index: track 30 day implied vol of S&P 500 index
characteristic of vol trading strategy
- Strategy implementation:
+ use feature of VIX index
+ use exchange traded options
+ use OTC options
+ use OTC swap or variance swap - Investment characteristics:
+ short vol:- earn premium
- stable return in stable market
+ Long vol: - positive convexity
- valuable as a hedge
+ Liquidity: depend on instrument use
+ easy leverage
+ difficult to find benchmark
- Roles:
+ high negative correlative with return -> diversify benefits
+ premium paid to vol seller
reinsurance / life settlement definition
+ Life settlement: insured person sell insurance policy to HF -> HF liable premium
+ Reinsurance:
characteristics of reinvestment / life settlement
- Implementation:
+ seek out policies:- low policies price
- low ongoing premium payment
- insured person die soon
+ estimate life expectancy
- invesment characteristic: illiquid
- role:
+ uncorelate with market risk & biz cycle
+ alpha
multi manager HF strategies definition
a portfolio of diverse HF strategies
2 types of multi HF strategies
(1) FOF
(2) Multi strategies HF
advantage of FOF
(1) Diversification across HF strategies
(2) Expertise in individual manager selection
(3) Strategic allocation and style allocation
(4) Due diligence
(5) Occasional value-added tactical decisions
(6) Currency hedging
(7) Leverage at the portfolio level
(8) Better liquidity terms vs. individual hedge funds
(9) Access to certain closed hedge funds
(10) Economies of scale for monitoring
(11) Research expertise
(12) Potential liquidity efficiencies
(13) Potentially valuable concessions from the underlying funds
disadvantage of fof
(1) A double layer of fees for the investor
(2) Lack of transparency into individual hedge funds
(3) No performance fees netting
(4) Additional principal–agent issues
definition of multi strategies HFs
the sub fund of multi strategies HF are run by the same organization
characteristics of multi strategy HFs
- Investment characteristics:
+ FOF: - strategy implementation:
+ greater ability to make tactical allocations
+ great use leverage - Role:
+ greater diversification
+ steady, low vol return
+ perform better than fof because of:- fee structure
- greater ability to exercute tactical allocation
+ left tail blow up during the time of stress
niche
= appropriate
gate of mutual fund
maximum amount the investor can redeem at one time
Lock -up period (what?)
the restriction of redemption in the period
netting risk
a typical of FoF because it has higher management fee rather than invest in separate fund
buy the dip
means purchasing an asset after it has dropped in price
surrender value
The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy (thap hon cash value, surrender value la gia tri nhan dc neu ko xay ra su kien bao hiem)
three characteristics that hedge fund managers look for when investing in life settlements
(1) The surrender value offered to the insured individual: low
(2) The ongoing premium payments to keep the policy active: low.
(3) the probability that the designated insured person is likely to die earlier than predicted by standard actuarial methods: high
level of private real estate diversification against public equity
moderate
Carry trades
+ long a higher-yielding security + shorting a lower-yielding security
+ long discount currency, short premium currency
+ expectation: mispricing reverts to normal => receiving the positive carry and of profiting on long and short sides of the trade
sortino ratio
Sortino Ratio = (Rp - Rf) / sigma downside
conditional linear factor model
applied to a hedge fund strategy’s returns
can be represented as:
(Return on HFi)t = αi + βi,1(Factor 1)t + βi,2(Factor 2)t + … + βi,K(Factor K)t +
Dtβi,1(Factor 1)t + Dtβi,2(Factor 2)t + … + Dtβi,K(Factor K)t +
(error)i
payoff profile of the merger arbitrage strategy
= riskless bond + short put option
(1) lock-up period
(2) liquidity gate
(3) exit window
the minimum holding time
Aim:
+ thời gian tối thiểu để chiến lược được hiệu quả
+ liquidity
index-based short hedge
phụ trợ cho việc long cổ phiếu, short chỉ số để giảm market risk
đặc trưng của Equity market neutral
A. quantitative
B. discretion
A. Quantitative
- Pair trading la gi
long-short stock similar but misprice
- Stub trading la gi
long-short stock of parent company & its subsidiaries
- Multi-class trading: la gi
L/S different share classes of the same firm
return profile của merge arbitrage là ntn ?
= insurance like + short put option
