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Hedge Fund strategies Flashcards

1
Q

single-manager fund

A

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

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2
Q

multi-manager fund

A

portfolio managers trade and invest in multiple different strategies within the same fund.

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3
Q

Definition of fund-of-funds

A

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

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4
Q

Equity-related hedge fund strategies

A

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

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5
Q

Event-driven hedge fund strategies

A

focus on corporate events, such as governance events, mergers and acquisitions, bankruptcy, and other key events for corporations
(1) Merger Arbitrage
(2) Distressed securities

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6
Q

Relative value hedge fund strategies

A

focus on the relative valuation between two or more securities

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7
Q

Opportunistic hedge fund strategies

A

take a top-down approach, focusing on a multi-asset (often macro-oriented) opportunity set
(1) Macro
(2) Volatility trading

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8
Q

Specialist hedge fund strategies

A

focus on special or niche opportunities that often require a specialized skill or knowledge of a specific market
Type:
+ Volatility trading
+ Reinsurance/Life Settlement

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9
Q

Multi-manager hedge fund strategies (what focus on ?)

A

focus on building a portfolio of diversified hedge fund strategies

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10
Q

DISTRESSED SECURITIES strategy

A

focus on firms that either are in bankruptcy, facing:
+ potential bankruptcy
+ under financial stress

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11
Q

fulcrum securities

A

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.

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12
Q

take positions as directional

A

use fundamental to determine over/undervalue

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13
Q

take positions as thematic

A

so sánh giá của 2 securities để long-short

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14
Q

TSM

A

time series momentum: -> trend following
+ buy securities have been rising in price
+ sell securities have been falling in price

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15
Q

6 hedge fund key features

A

(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

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16
Q

6 hedge fund strategies

A

(1) Equity related
(2) Event drivent
(3) Relative value
(4) Oppotunistic
(5) Specialist
(6) Multi-manager

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17
Q

what is equity related strategies

A

+ focus on stocks
+ major risk: equity risk
(1) L/S
(2) Dedicated short/ short bias
(3) equity market neutral

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18
Q

what is event - driven strategies

A

+ Strategy related to corporate actions (M&A, bankruptcy…)
+ Major risk: event risk

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19
Q

what is relative value strategy

A

seek profit from valuation differences btw sectors
Risk:
+ credit risk
+ liquidity risk
Type:
+ Fixed income arbitrage
+ Convertible bond Arbitrage

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20
Q

what is oppotunistic strategy

A

top-down approach, focus on a multi-asset (often macro oriented) oppotunity set
(1) macro trading
(2) manage future

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21
Q

specialist strategy

A

focus on special or niche oppotunities-> require specialized skill /knowledge
(1) manage future
(2) global macro

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22
Q

Multi manager strategies

A

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

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23
Q

3 strategies in equity related hedge fund strategiesch

A

(1) Long/short Equity
(2) Dedicated short selling & short - biased
(3) Equity market neutral

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24
Q

characteristics of L/S Equity

A
  1. Strategy implementation:
    + long underprice & short overprice
    + sector specific focus
  2. investment characteristics:
    + market exposure of portfolio
    + 40% - 60% net long
    + arachive return to compare to long-only, but half amount std deviation
  3. Role:
    + source alpha, also benefit from moderate long exposure
    + high fee -> archive comparable beta
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25
Q

characteristics of dedicated short selling & short bias

A
  1. Definition:
    + determince overprice -> short
    + Dedicated short selling:
    • pure shot
    • 60% - 120% shot
      + Short - biased:
    • net short exposure
    • 30% - 60% net short
    • activist short selling
  2. 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
  3. Investment characteristics:
    + negative correlation with conventional securities
    + lower expected return
  4. Role in portfolio:
    + return uncorrelated with conventional securities
    + unreliable & relatively low expected return
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26
Q

Equity market neutral

A
  1. Definition: seek to attain near - zero to exposure to the market
  2. 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
  3. Investment characteristics:
    + generate alpha
    + diversification
    + low volatility
  4. Role in a portfolio:
    + Produce alpha without market beta risk
    + value when market volatility & poorly
    + less volatile
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27
Q

definition of event-driven hedge fund strategies

A

+ 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

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28
Q

soft catalyst event-driven approach

A

investment made before event announce

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29
Q

hard catalyst event-driven approach

A

approach when investment made after event announce

30
Q

event driven hedge fund strategies sub types

A

+ Merge arbitrage
+ Disstressed securities

31
Q

characteristics of merge arbitrage

A
  1. Strategy implementation:
    + Most common: expect successful deal | Less common: expect failure deal
    + high leverage: 300% - 500%
    + involve cross border -> more risky
  2. Investment characteristics:
    + left tail risk when outcome is not expected
    + more liquid to typical HF strategies
  3. Role:
    + high Sharpe ratio
    + significant left-tail risk
32
Q

characteristic of disstressed securities strategy

A
  1. Definition: take position on firm in financial distress (firm bankruptcy, near bankruptcy) -> to liquidate/reorganize
  2. strategy implement:
    + Form: passive/active
    + require particular broad range of skill to navigate various legal aspects
    + take a long of investment
    + low leverage
  3. investment characteristic:
    + large return - larger variance of outcome
    + long lockup periods (often 2 years)
  4. Role:
    + return higher
    + unpredictable & sensitive to market
    + high level of illiquidity
33
Q

relative value hedge fund strategies definition

A

+ exploit valuation differences between securities
+ if sucess, earn various premium:
* liquidity premium
* credit premium
* volatility premium

34
Q

2 types of ralative value HF strategies

A

(1) FI arbitrage
(2) convertible bond arbitrage

35
Q

characteristics of FI arbitrage

A
  1. Strategy implementation:
    + Yield curve trades:
    • YC steppen/flatten
    • Risk: interest rate risk, liquidity risk, credit risk
      + Carry trades:
    • short low/ long high
  2. Investment characteristic:
    + return relative small -> leverage should use
    + liquidity: depend on strategy + type of FI
  3. Role:
    + return distribution similar to writing puts
    + high volatility due to high level of leverage
36
Q

characteristics of convertible bond arbitrage

A
  1. Strategy implementation:
    + option within CBs exhibit low implied vol
    + hedge out the delta and gamma risk
  2. Investment characteristic:
    + short selling the underlying equity
    + complex niche products (SP phuc tap)
  3. 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
      +
37
Q

oppotunistic HF strategies definition

A

+ 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

38
Q

2 types of Opptunistic HF strategies

A

(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

39
Q

characteristic of global macro HF strategy

A
  1. Definition:
    + make forcast of various global economics variables
    + use broad range of security types and global asset classes
40
Q

characteristics of manage future

A
  1. Definition: take long/short position various derivatives contracts
  2. 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
  3. Investment characteristics:
    + Leverage: highly
    + Liquidity: extreme
    + Other: crowding effect
  4. Role:
    + little correlation with traditional secs -> improve risk adjusted return
    + during market stress: positive right tail skew -> diversified benefit
41
Q

CSM

A

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

42
Q

definition of specialist HF strategy

A

use knowledge of a particular market to pursuit niche investment oppotunities

43
Q

2 types of specialist HF strategies

A

(1) Vol trading
(2) reinsurance/ life settlement

44
Q

definition of vol trading strategy

A
  1. How:
    + exploit differences in vol pricing
    + Long vol seekers
  2. VIX index: track 30 day implied vol of S&P 500 index
45
Q

characteristic of vol trading strategy

A
  1. Strategy implementation:
    + use feature of VIX index
    + use exchange traded options
    + use OTC options
    + use OTC swap or variance swap
  2. 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
  3. Roles:
    + high negative correlative with return -> diversify benefits
    + premium paid to vol seller
46
Q

reinsurance / life settlement definition

A

+ Life settlement: insured person sell insurance policy to HF -> HF liable premium
+ Reinsurance:

47
Q

characteristics of reinvestment / life settlement

A
  1. Implementation:
    + seek out policies:
    • low policies price
    • low ongoing premium payment
    • insured person die soon
      + estimate life expectancy
  2. invesment characteristic: illiquid
  3. role:
    + uncorelate with market risk & biz cycle
    + alpha
48
Q

multi manager HF strategies definition

A

a portfolio of diverse HF strategies

49
Q

2 types of multi HF strategies

A

(1) FOF
(2) Multi strategies HF

50
Q

advantage of FOF

A

(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

51
Q

disadvantage of fof

A

(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

52
Q

definition of multi strategies HFs

A

the sub fund of multi strategies HF are run by the same organization

53
Q

characteristics of multi strategy HFs

A
  1. Investment characteristics:
    + FOF:
  2. strategy implementation:
    + greater ability to make tactical allocations
    + great use leverage
  3. 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
54
Q

niche

A

= appropriate

55
Q

gate of mutual fund

A

maximum amount the investor can redeem at one time

56
Q

Lock -up period (what?)

A

the restriction of redemption in the period

57
Q

netting risk

A

a typical of FoF because it has higher management fee rather than invest in separate fund

58
Q

buy the dip

A

means purchasing an asset after it has dropped in price

59
Q

surrender value

A

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)

60
Q

three characteristics that hedge fund managers look for when investing in life settlements

A

(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

61
Q

level of private real estate diversification against public equity

A

moderate

62
Q

Carry trades

A

+ 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

63
Q

sortino ratio

A

Sortino Ratio = (Rp - Rf) / sigma downside

64
Q

conditional linear factor model

A

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

65
Q

payoff profile of the merger arbitrage strategy

A

= riskless bond + short put option

66
Q

(1) lock-up period
(2) liquidity gate
(3) exit window

A

the minimum holding time
Aim:
+ thời gian tối thiểu để chiến lược được hiệu quả
+ liquidity

67
Q

index-based short hedge

A

phụ trợ cho việc long cổ phiếu, short chỉ số để giảm market risk

68
Q

đặc trưng của Equity market neutral
A. quantitative
B. discretion

A

A. Quantitative

69
Q
  • Pair trading la gi
A

long-short stock similar but misprice

70
Q
  • Stub trading la gi
A

long-short stock of parent company & its subsidiaries

71
Q
  • Multi-class trading: la gi
A

L/S different share classes of the same firm

72
Q

return profile của merge arbitrage là ntn ?

A

= insurance like + short put option

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