Reading 17 - Hedge Fund Strategies Flashcards
What are the different types of hedge fund strategies?
SOMEE
- Equity related
- Event driven
- Relative Value
- Opportunistic
- Specialist
- Multi-manager
What are the types of equity related strategies?
- long/short equity
- short-biased
- market neutral
What is the typical exposure of a long/short fund?
40%-60% net long exposure
dedicated short selling funds
seek out securities that are overpriced in order to sell them short
does not take on any long stock exposure
short biased managers
use similar strategy to dedicated short-selling, but short position is somewhat offset by the long exposure
activist short selling
fund manager takes a short position but also presents research that contends that the stock is overpriced
How are the return expectations of short selling strategies?
usually lower
what is the primary aim of short selling strategies?
aim to produce negative correlation with conventional securities
what is the typical exposure of a dedicated short-seller?
60% - 120% short
what is the typical exposure of a short-biased manager?
30% - 60% net short
Do short sellers and short-biased managers use leverage?
very little
[think of it as too much risk has already been taken]
Equity market neutral strategies
seek to attain near-zero overall exposure to the stock market. Betas of long and short positions add up to 0.
Long temporarily undervalued positions and short temporarily overvalued positions. When mean reversion eventually occurs, alpha should result.
where does alpha in EMN strategies come from?
From taking positions that are temporarily mispriced
What is the aim and advantage of EMN funds?
generated alpha and is relatively immune to overall market (low volatility). They do not take market beta risk.
Do EMN strategies use leverage?
Yes
Since they deliberately hedge away market beta, leverage is generally applied in order to achieve acceptable levels of return
Name subtypes of EMN funds
- Pairs trading
- Stub Trading
- Multi-class trading
What is stub trading?
Involved going long and short shares of a subsidiary and its parent company. Generally the position taken correspond to the percentage of the subsidiary owned by the parent.
What is multi-class trading?
Going long and short relatively mispriced share classes of the same firm eg voting and non-voting shares. As the pricing of these shares revert to their traditional valuations, profits can be made.
When are EMN strategies best?
when markets are volatile and performing poorly
What is a soft-catalyst event-driven approach?
Investment made before an event is being announced
What is a hard-catalyst event-driven approach?
Investment made after a corporate event is being announced, taking advantage of security prices that have not fully adjusted.
What is more volatile - hard catalyst or soft catalyst approach?
Soft-catalyst approach is generally more volatile and thus riskier than hard-catalyst approach
What is the main risk impacting event-driven strategies?
Event risk - chances that the outcome of the event will not be the one anticipated
Name the 2 types of event-driven hedge fund strategies
- Merger arbitrage
- distressed securities