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CWM Financial Markets > Hedge Funds > Flashcards

Hedge Funds Flashcards

1
Q

What is a hedge fund?

A

Alternative Investment
Aim to deliver absolute returns
Use a variety of investment stratergies

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2
Q

Where are hedge funds located? Why?

A

Offshore
Tax Benefits & Lax Reporting

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3
Q

Who regulates HFs in the UK?

A

The FCA

Despite being offshore / unauthorised

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4
Q

Who are hedge funds aimed at? Why?

A

UHNWI & Institutions
High minimum investment

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5
Q

What restrictions are HFs subject to?

A

Short Selling
Credit Default Swaps

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6
Q

How are HFs regulated re: Short Selling

A

1) Disclose positions >0.2%
2) Limited ability during market turmoil
3) Banned from Naked Shorting

Short selling not permitted during COVID

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7
Q

What to HFs aim to deliver?

A

Absolute Returns
Regardless of market conditions

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8
Q

What fees do HFs charge?

A

Management (1.5%-2%)
Incentive / Performance

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9
Q

Give 3 Points about HF incentive fees?

A

1) Pay out after reaching a certain level
2) cannot be paid until a high watermark NAV is met
3) Losses must be recouped before it is paid

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10
Q

How are managers renumerated?

A

1) Fixed Fee - % of AUM
2) Performance Fee

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11
Q

What jurisdictions are HFs domiciled in?

A
  • Cayman Islands
  • Bahamas
  • Bermudas
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12
Q

What are the three types of Hedge Fund Strategy?

A

1) Arbitrage / Non-Directional
2) Event Driven
3) Directional

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13
Q

What are non-directional funds?

A

Aim to deliver a positive return in all markets - exploit mispricings

Eliminate Market Risk - Performance is down to managers skill

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14
Q

What is an event driven fund?

A

Seeks to exploit mispricing following events e.g.
1) Corporate Actions
2) Mergers
3) Bankruptcy

Tend to be short term funds (apart from distressed)

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15
Q

What is a directional fund

A

Takes a view on direction of market or asset class.

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16
Q

What two categories of directional funds are there?

A

1) Equity Hedge
2) Tactical Trading

17
Q

What are the 3 event driven funds?

A

1) Special Situations
2) Merger Arbitrage
3) Distressed Companies

18
Q

What are the 6 non-directional funds?

A

1) Equity Market Neutral
2) Convertible Arbitrage
3) Statistical Arbitrage
4) Fixed Income Arbitrage
5) Relative Value
6) Volatility Arbitrage

19
Q

What are the 4 equity hedge directional stratergies

A

1) Long/Short
2) Short Only
3) Emerging Markets
4) Private Placements

20
Q

What are the 2 tactical trading stratergies

A

1) Global Macro
2) Systematic Stratergies

21
Q

How does relative value work?

A
  • Focuses on two assets and the spread between them
  • Buy or sell the spread using instruments like swaps
  • If spread is to widen you would sell
22
Q

How does fixed income arbitrage work?

A

Exploit inefficiencies in:
1) Yield Curves
2) Spreads
3) Pricing

Can purchase different durations from the same issuer

(if yield is rising at long end of issuer curve -> buy short sell long duration)

23
Q

What is an equity market neutral strategy?

A

1) Pick two correlated assets (pairs trading)
2) Go Long / Short to create a balanced beta
3) High risk of betas changing

24
Q

What is convertible arbitrage?

A

1) Long convertible
2) Short Issuer equity
3) Exploit mispricings

25
Q

Criticisms / Risks of Convertible Arbitrage:

A

1) Riskier than orignally assumed
2) Long and Short can move against you
3) Lost popularity during ultra low rate environment

With rate uncertainty - it’s more prevalent

26
Q

What is statistical arbitrage?

A
  • Use statistics to generate signals to trade
  • Belief of mean reversion (hard to say when mean will revert)
  • Uses momentum investing
27
Q

What is volatility arbitrage?

A
  • Using options to trade implied vs forecasted volatility
  • If you beleive volatility is overstated sell a call option
  • Profit from changes in option pricing
28
Q

What is a special situations fund?

A
  • Attempt to profit from mispricing following:
  • Corporate Actions
  • Takeovers
  • Bankruptcies
  • Valuations are out of line / inaccurate
29
Q

What is Merger Arbitrage?

A

Profit from spreads changing following merger announcements
- Buy target
- Sell acquirer
- Low risk unless merger fails

30
Q

What is a distressed companies fund?

A

Firm facing bankruptcy assets’ will trade cheap
1000bps over base rate
CCC rated
Fund takes the view that company will survive and can buy assets cheap

Only long term event driven strategy.

31
Q

What is Long / Short directional?

A
  • Identify intrinsic price
  • Identify mispricing (long and short)
  • Will be net long / net short
  • Outperform in bear market
  • underperform in rapidly rising markets
32
Q

What is a short only fund?

A
  • Due diligence to find overpricing / problems
  • Permanent pessimists
  • Work as a hedge in bear market
  • Rare now as markets are upward trending
33
Q

What is an emerging markets hedge fund?

A
  • Uses equity, debt, commodities & special sits
  • Targets high growth areas like BRICs
  • Record of outperforming developed markets
  • Growth worse in recent times
  • Higher risk e.g. Russia
34
Q

What is a private placement hedge fund?

A

Invest in securities which do not require a full prospectus
Issued direct to investors (not public)

35
Q

What is a global macro hedge fund?

A
  • Popularised by George Soros
  • Large best on macro e.g. FX or Index
  • Combine research with technical analysis
36
Q

What is a systematic directional hedge-fund?

A
  • Use maths / models to generate signals
  • Ride Trends
  • Use intermarket tactics (e.g. JPY / AUD pair relationship)
  • Blackbox funds - use Propreiatary systems that are not disclosed to the public
37
Q

Benefits of Fund of Fund HF

A
  • Smaller investors get access
  • Manager Knowledge
  • Access to closed funds
  • Diversification
38
Q

Limitations of Fund of Fund HF?

A
  • Double Fee - hard to make profit
  • No communication with HF manager
  • Diversification can be counter-productive
  • Less visibility of underlying
39
Q
A

CWM Financial Markets (58 decks)

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