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Alternative Investments > LM 6: Hedge Funds > Flashcards

LM 6: Hedge Funds Flashcards

1
Q

What is the ultimate goal of hedge funds?

A

to generate high risk-adjusted returns.

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2
Q

What are 5 broad categories hedge funds are placed into based on strategy? EEROM

A
  1. Equity hedge strategies
  2. Event-driven strategies
  3. Relative value strategies
  4. Opportunistic strategies
  5. Multi-manager
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3
Q

What kind of approach do hedge funds use for equity hedge strategies?

A

Bottom-up approach.

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4
Q

What are 5 equity hedge strategies? FFFSM

A
  1. Fundamental long/short
  2. Fundamental growth
  3. Fundamental value
  4. Short biased
  5. Market Neutral
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5
Q

What is a fundamental long/short and fundamental growth equity hedge strategy?

A

fundamental long/short: taking long or short positions depending on whether securities are trading above or below their intrinsic value.

fundamental growth: long positions in companies with fundamentals that indicate potential for growth and capital appreciation.

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6
Q

What is a fundamental value and short-biased equity hedge strategy?

A

fundamental value: trading value stocks that are undervalued

short biased: trading stocks that are overvalued due to reasons such as bad accounting, business practices, etc.

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7
Q

What is a market-neutral equity hedge strategy?

A

Long positions in undervalued equities are offset with short positions in equities that have been assessed as overvalued based on quantitative, technical, and fundamental analysis.

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8
Q

What are event-driven strategies for hedge funds?

A

seek to profit from anticipated short-term events that are likely to have a significant impact on security valuations.

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9
Q

What kind of approach do hedge funds use for event driven strategies?

A

bottom-up approach

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10
Q

What are 4 event-driven strategies? MDSA

A
  1. Merger arbitrage
  2. Distressed/restructuring
  3. Special situations
  4. Activist
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11
Q

What is a merger arbitrage event-driven strategy?

A

purchasing shares of the target company in an announced or expected merger while simultaneously shorting the acquirer’s shares.

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12
Q

What is a distressed/restructuring event-driven strategy?

A

Managers purchase the debts of companies that are on the verge of (or already in) the bankruptcy process

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13
Q

What are fulcrum securities?

A

Distressed debt instruments that are expected to be converted

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14
Q

What is a special situation event-driven strategy?

A

Managers take long equity positions in companies that are expected to take certain actions, such as share repurchases, special dividend payments, spin-offs, or asset sales.

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15
Q

What is an activist event-driven strategy?

A

Managers accumulate sufficient voting rights with the intention of gaining representation on a company’s board and having a direct influence its policies and strategic direction.

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16
Q

What are relative value strategies?

A

seek to profit from pricing discrepancies by trading related securities.

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17
Q

What are 4 relative value strategies?

A
  1. convertible bond arbitrage
  2. fixed income (general)
  3. fixed income (asset-backed, mortgage-backed, and high yield)
  4. multi-strategy
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18
Q

What is a convertible bond arbitrage relative value strategy?

A

convertible debt security, involves taking long position in convertible debt and shorting equity

19
Q

What is a fixed income (general) relative value strategy?

A

Positions are taken based on assumptions about the relative prices of pairs of debt securities. exploit perceived mispricings in sovereign debt and investment grade corporate bonds

20
Q

What is a fixed income (asset-backed, mortgage-backed, and high yield) relative value strategy?

A

same thing as fixed income (general) just for asset-backed, mortgage-backed, and high-yield.

21
Q

What is a multi-strategy relative value strategy?

A

same relative value principles are applied but, rather than limiting their focus to specific market segments, managers take positions across a variety of asset classes and instruments.

22
Q

What are 2 opportunistic strategies?

A
  1. macro strategies
  2. managed futures
23
Q

What is macro strategy opportunistic strategy?

A

use a top-down approach, taking long and short positions based on the analysis of economic variables.

24
Q

What are commodity trading advisers (CTA’s)?

A

hedge funds. since they have traditionally been focused on the commodity asset class.

25
Q

What are managed futures strategy opportunistic strategies?

A

funds make diversified directional bets based on momentum and trends using a variety of futures contracts, including commodity, equities, fixed income, and foreign exchange.

26
Q

What are the 7 key features of modern hedge funds? LLMRALH

A
  1. Low legal and regulatory restrictions
  2. Large investment universe
  3. Managerial discretion to use derivatives and short positions
  4. Relatively high use of leverage
  5. Aggressive investment strategies, often executed with concentrated positions
  6. Limits on liquidity
  7. High fees
27
Q

What is a lockup period?

A

minimum period that limited partners are required to keep their money in the hedge fund.

28
Q

What is a soft lockup period?

A

allows investors to redeem shares during the lockup period if they are willing to pay a a significant redemption fee.

29
Q

What are notice periods?

A

30 to 90 days before an investment redemption can be made.

30
Q

What are liquidity gates?

A

limit or restrict redemptions for a period

31
Q

What is a side letter?

A

side letters refer to written agreements between a fund and its LP that afford said LP special rights, privileges, and obligations outside the standard limited partnership agreement (LPA) that all investors agree to

32
Q

What are 3 things a side letter might include?

A

additional reporting, lower fees, or the right to co-invest.

33
Q

What is a master feeder structure?

A

cash flows from investors go into either an onshore feeder fund or an offshore feeder fund and into a master fund. the master fund then makes investments.

34
Q

What is a two and twenty arrangement?

A

2% of fund assets (management fee) and a 20% performance fee.

35
Q

What is a fund of one?

A

large investors who have the money to be the only limited partner.

36
Q

What are 2 characteristics of a separately managed account (SMA)?

A
  1. The account holder actually owns the assets
  2. Has greater influence of the manager’s decisions.
37
Q

What are 2 disadvantages of SMA hedge fund arrangements?

A
  1. more operationally complex
  2. require greater governance oversight.
38
Q

What is an indirect hedge fund investment form?

A

hedge fund of funds (FoF)

39
Q

What is a hedge fund of funds (FoF)?

A

funds that invest in multiple hedge funds.

aka portfolio of hedge funds

40
Q

What are 3 hedge fund biases that lead to overstated returns?

A
  1. selection bias
  2. survivorship bias
  3. backfill bias
41
Q

What is selection bias?

A

concern if the criteria for inclusion in an index are inconsistent.

example: if AUM decreases and is no longer large cap is mid-cap but still included as large-cap.

42
Q

What is survivorship bias?

A

results from only including currently-active funds in an index while removing funds that have stopped reporting

43
Q

What is backfill bias?

A

managers are given the option to report returns from periods before their fund was added to to an index.

44
Q

What are the 3 sources of returns for hedge funds?

A
  1. Idiosyncratic (business, company-specific risk)
  2. Sector /Style (Industry risk, liquidity risk, etc)
  3. Market (equity market movement, interest rates, currency)

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