Hedge Fund Strategies 2 - Simplified Flashcards
Long-Short Equity
🔹 Core Idea: Mix of long (buying) and short (selling) positions to extract alpha.
🔹 Key Features:
Relies on fundamental research.
Managers specialize in specific sectors, geographies, or styles.
Exposure is 40-60% net long, sometimes 70-90% long and 20-50% short.
Uses short-selling to hedge market risk.
Typically used by hedge funds and mutual funds.
🔹 Memory Trick:
Think of a seesaw – balancing long and short positions to extract market inefficiencies.
Dedicated Short Bias
🔹 Core Idea: Strategy focuses primarily on short-selling.
🔹 Key Features:
Always net short (60-120% short exposure).
Return goals are lower than L/S but provide negative correlation benefits (good in downturns).
Often uses activist short selling (exposing fraud).
Difficult due to operational challenges and short squeezes.
🔹 Memory Trick:
Imagine a parachute—this strategy performs well when markets fall but struggles in bull markets.
Equity Market Neutral (EMN)
🔹 Core Idea: Fully hedged long-short equity strategy with zero beta (market risk).
🔹 Key Features:
Seeks sector and industry neutrality.
Focused on pairs trading, stub trading, and multi-class trading.
High leverage due to low market risk.
Strategies are typically quantitative and use frequent rebalancing (daily/hourly).
🔹 Memory Trick:
Think of a tightrope walker – perfectly balanced with no market exposure (Beta = 0)
Merger Arbitrage
Core Idea: Profits from price movements before or after mergers/acquisitions.
🔹 Key Features:
Soft-catalyst approach: Trade in anticipation of an event.
Hard-catalyst approach: Trade after an event is announced (less risky).
Deals can be cash-for-stock (buy target) or stock-for-stock (hedged).
High leverage (3-5x) is used.
🔹 Memory Trick:
Imagine a wedding planner—profiting from deals going through but risks if the wedding gets canceled.
Distressed Securities
🔹 Core Idea: Invests in securities of companies in bankruptcy or financial distress.
🔹 Key Features:
Long-biased, subject to extreme returns (binary: success or failure).
High illiquidity due to long legal processes.
Can involve liquidation (debt priority) or reorganization (capital structure arbitrage).
Investors may hold senior debt or fulcrum securities.
🔹 Memory Trick:
Think of a vulture – looking for companies in distress, waiting to profit from their recovery
Fixed-Income Arbitrage
🔹 Core Idea: Profits from mispricings in fixed-income securities.
🔹 Key Features:
Focuses on yield spreads, credit quality, and volatility differences.
Pricing inefficiencies are small, so high leverage is required.
Used in sovereign bonds, mortgage-backed securities, and corporate debt.
🔹 Memory Trick:
Think of a magnifying glass – finding tiny pricing inefficiencies in bond markets.
Convertible Bond Arbitrage
🔹 Core Idea: Exploits mispricings in convertible bonds and their embedded options.
🔹 Key Features:
Buys undervalued convertible bonds and hedges by shorting equity.
Key Risk: Interest rate, credit, and market volatility.
High leverage required (300% long, 200% short).
🔹 Memory Trick:
Think of a transformer toy – switching between debt and equity to optimize risk-return.
Global Macro Strategies
Core Idea: Trades broad market themes based on economic trends.
🔹 Key Features:
Highly anticipatory (sometimes contrarian).
Uses leverage (6-7x).
Volatile but produces large gains when correct.
Mean-reverting strategies struggle in low volatility.
🔹 Memory Trick:
Think of a weather forecaster – betting on big market shifts.
Managed Futures
🔹 Core Idea: Uses futures contracts to profit from market trends.
🔹 Key Features:
Systematic, rules-based models.
Trades commodities, bonds, currencies, and equities.
Highly liquid, scalable, and offers diversification benefits.
🔹 Memory Trick:
Think of a robot trader – follows systematic rules to catch trends.
Volatility Trading
🔹 Core Idea: Profits from volatility mispricing.
🔹 Key Features:
Relative Value Volatility Arbitrage: Buys cheap volatility, sells expensive.
Uses VIX futures, options, and swaps.
Must consider term structure, skew, and smile.
🔹 Memory Trick:
Think of a surfer – riding market waves (volatility spikes).
Fund of Funds (FoF)
🔹 Core Idea: Invests in multiple hedge funds for diversification.
🔹 Key Features:
Offers more diversification and lower volatility.
High fees (layered management and performance fees).
Slower tactical reaction time.
🔹 Memory Trick:
Think of a basket of eggs – spreading risk across many hedge fund strategies.
Multi-Strategy Hedge Funds
🔹 Core Idea: One hedge fund runs multiple strategies internally.
🔹 Key Features:
More leverage than FoFs but better strategy transparency.
Fee netting reduces costs.
Faster tactical asset allocation.
🔹 Memory Trick:
Think of a Swiss Army knife – combining different tools (strategies) within one hedge fund.
- Equity Strategies 🏛️ = Long/Short, Short Bias, Market Neutral (Stock Focus)
- Event-Driven 📅 = Merger Arb, Distressed Securities (Corporate Actions)
- Relative Value ⚖️ = Fixed-Income Arb, Convertible Arb (Bond & Credit Mispricings)
- Global Macro 🌍 = Macro, Managed Futures (Big Market Trends)
- Specialist ⚡ = Volatility Trading (VIX, Options)
- Multi-Manager 🎭 = Fund of Funds, Multi-Strategy (Diversification)
- Equity Strategies 🏛️
- Long/Short,
- Short Bias,
- Market Neutral (Stock Focus)
- Event-Driven 📅
- Merger Arb,
- Distressed Securities (Corporate Actions)
- Relative Value ⚖️
(Bond & Credit Mispricings)
* Fixed-Income Arb
* Convertible Arb
- Global Macro 🌍
Big Market Trends
* Macro
* Managed Futures
- Specialist ⚡
- Volatility Trading (VIX, Options)
- Multi-Manager 🎭
Diversification
* Fund of Funds
* Multi-Strategy
