Revised Hedge Fund Strategies

Question 1

What are some common characteristics of hedge funds?

Answer 1

1. Legal/Regulatory - accredited investors, liquid alts
2. Flexibility
3. Large Universe
4. Aggresive Style
5. Leverage
6. Liquidity Constraints
7. High fees

Question 2

What are the six broad classifications of hedge funds?

Answer 2

1. Equity
2. Event Driven
3. Relative Value
4. Opportunistic
5. Specialist
6. Multi-manager

Question 3

What are the types of equity hedge fund strategies?

Answer 3

1. Long/short equity
2. Dedicated short bias
3. Market Neutral

Question 4

What are the types of event driven hedge fund strategies?

Answer 4

1. Merger Arb

2. Distressed Securities

Question 5

What are the types of relative value hedge fund strategies?

Answer 5

1. FI

2. Convertibles

Question 6

What are the types of opportunistic hedge fund strategies?

Answer 6

1. Global macro

2, Managed Futures

Question 7

What are the types of specialist hedge fund strategies?

Answer 7

1. Volatility

2. Reinsurance

Question 8

What are the types of multimanager hedge fund strategies?

Answer 8

1. Fund of Funds

2. Multistrategy

Question 9

Describe the benefits, costs, risk profile, liquidity, and use of leverage for long short equity

Answer 9

Benefits:
Wide universe and better use of information
Liquid
Diversified
short side alpha
reduced bolatility
Risk:
Looking for risk profile similar to long only with less volatility
Liquidity - high
Leverage use - variable, depending on how market neutral they are

Question 10

Describe the benefits, costs, risk profile, liquidity, and use of leverage for short bias funds

Answer 10

Benefits:
negative correlation to equities
Liquid
negatively correlated alpha
Risk:
Lower returns
More volatile than normal long shorts
Liquidity - high
Leverage - not much as volatility is high

Question 11

Describe the benefits, costs, risk profile, liquidity, and use of leverage for market neutral funds

Answer 11

Benefits:
Takes advantage of short term pricing
Low vol
attractive during market weakness
Diverse holdings due to quant
Good during non trending markets
Risk:
Low vol low return
Liquidity - decent
Leverage - high

Question 12

What are the pros and cons of specialized long short managers?

Answer 12

Pros:
higher likelihood of alpha on both sides
Unique - not just long beta
Cons:
Hard to understand performance
fewer to choose from
Risk of sector tanking
overall portfolio may become concentrated

Question 13

Describe the benefits, costs, risk profile, liquidity, and use of leverage for merger arb funds

Answer 13

Benefits:
Uncorrelated alpha
Risk:
Low double digit returns with mid single digit vol
Very binary outcomes
Tail risk
Liquidity:
Low
Leverage - mid

Question 14

Describe the benefits, costs, risk profile, liquidity, and use of leverage for distressed funds

Answer 14

Benefits:
Alpha through deal selection
Risk:
High returns high vol
Leverage - low - moderate

Question 15

Describe the benefits, costs, risk profile, liquidity, and use of leverage for fixed income arb funds

Answer 15

Benefits:
take advantage of price inefficiencies created by complex bonds and structured products
Risk:
Mid vol, mid returns
Liquidity - low-mid
Leverage - high

Question 16

Describe the benefits, costs, risk profile, liquidity, and use of leverage for convertible bond arb funds

Answer 16

Benefits:
Take advantage of cheap implied vol, which makes the call cheap
Make money when vol of underlying equity is higher than implied in the convertible
Risk:
Leverage is high

Question 17

What is it most attractive to use convertible bond arbitrage strategies?

Answer 17

1. When convertible issuance is high
2. Markets are liquid
3. Volatility is moderate

Question 18

What are some potential issues with convertible bond arbitrage?

Answer 18

1. If there is credit weakness
2. Convertible bond prices are affected a bunch by supply and demand
3. If you cannot short the underlying equity or it is too expensive
4. If the bonds have a small issue size or are very complex.