Vorträge Flashcards
What kind of Hedgefund is Bill Ackmans Pershing Square?
Event Driven: Activist Investor
What is Herbalife?
What was Bill Ackmans Position to Herbalife and what did Icahn?
Herbalife is a nutrition company, which products are only available through its distributors (Multilevel Marketing)
Ackman: Herbalife is a pyramid scheme –> Shorted: $45 -> $0
Icahn: –> Long position
(Daniel Loeb had a long position too)
What is one primary strategic move of an Activist investor?
Long:
Obtain representation on the board of directors to impact the firm’s policy and unlock shareholder values (such as share buybacks)
Short:
Publicly talks down the security
Risk rating of an Activist investor (especially Pershing square)
Leverage permission: leverage positions
Portfolio concentration: High portfolio concentration
Key man risk
Regulatory risk (changes in regulations) Reputational damage (negative publicity could impact manager on influencing companies) Exposure Risk (Limited visibility over portfolio exposures) Short risk (Short squeeze)
Short interest
Number of shares of a security, which are sold short and have not been settled yet (no repurchase)
Outstanding short positions on the market
Multilevel Marketing (Herbalife)
Individuals earn commission by selling products
and
for sales made by people THEY RECRUIT
Legitimate multilevel-marketing: Earnings are based on selling
Illegitimate pyramid scheme: Earnings are ALSO based on recruiting
Pershing Square Strengths, Weaknesses, Opportunities, Threads
Strengths: High concentration of investments + lower fee
Weaknesses: Key man risk, low diversification
Opportunities: Flexible mandate
Threats: Regulatory
Expose to Style Premia? (AQR)
If an investor is not already exposed to style premia, it is alpha to them:
Alpha (vor CAPM) + Equity Beta (mit CAPM) + Other Market Beta (Fama-French 3 factor model) + Hedgefund Beta
What are the 4 different style premia of AQR?
Carry (different yield between markets)
Momentum (Performance based on recent history)
Defensive (Assets with low beta have, relative to risk, higher yields compared to assets with high beta)
Value (Intrinsic value)
Carry trade
Invest in markets with high yield through borrowing on markets with low yield
Carry = Yield(long) - Yield(short)
Yield(long) > Yield(short)
Defensive
Anomaly of low beta: Betting against beta
Assets with low beta long – Assets with high beta short
Risk premia in reality lower than predicted by CAPM –> Lower sharpe ratios (especially for high volatility)
Momentum
Physics: Momentum = Weight * speed
Trend: Rising prices create more demand
Payoff like a long straddle (CTA)
Problem: Momentum has problems with correlations.
Value
Intrinsic Value ≠ Stock price –> market inefficiency
DCF & Multiples
Price < intrinsic value –> Long and vice versa
Schedule 13D
Regulatory disclosure of positions to SEC and showing the intention of activistic activity
–> Abnormal trading vol. before and after filing
Activist Strategy
Buy stocks –> SEC filing –> Contact Management –> Cooperation vs. Confrontation –> Formal shareholder applications –> Judicial –> Corporate transaction
Hedge funds often use help of other shareholders
Negative externalities of activist investors
Reduced influence of corporate boards on management
Higher discretion in firms
They only listen to the most important investors
Only symbolic reactions
Positive externalities of activist investors
Institutional investors (intermediaries) have no incentive to help out companies --> Hedgefunds do governance intervention --> Can reduce agency costs
Was ist Netto, was ist Brutto exposure?
Eine Bank, die in ihrem gesamten Devisenbestand 120 % „Long“ und 50 % „Short“-Positionen aufweist, besitzt eine Netto-Exposure von 70 %.
Als Brutto-Exposure (englisch gross-exposure) bezeichnet man die Addition von „Long“- und „Short“-Positionen, um die Summe aller offenen Positionen erkennen zu können.
Long Short Equity Strategy
Instruments: Long (Stocks, which are undervalued) & short (Stocks, which are overvalued) + Leverage
Risk: Strategy does not work;
Beta Mismatching: If market is declining strongly, the long positions lose more, than the short positions win
Idea: Use Spread between valuations and minimize market risk
Reasons for shortselling
Claims are way too aggressive Claims do not get corrected Inventory does not show all needed goods Securities not mark to marked Assets inflationary indexed Bad conditions for leverage Stupid assets in inventory
Value Investing versus Growth investing
Value investing:
Stocks are cheap/expensive compared to a benchmark
Watch stocks with high cash flows / trading below multiple
Growth Investing:
Analytical on capital, earnings and growth
Big numbers in past or future growth, sales, market share
Absolute return investing
Have big return independent of market situation
–> Watch only on absolute return at the end of the year
Pairs Risk
Widening spreads between long and short
Einhorn Effect
Sharp drop in prices, after einhorn announces a short position
Event-driven strategy:
Method: Speculation on special events + exploit valuation inefficiencies + Catalyst
Market: M&A (bull) – Special situations – Distressed (bear)
Examples: insolvency, m&a, restructuring etc.
Risks of Event Driven Distressed?
Liquidity risk: Forced liquidation of the company
Valuation Risk: no transparency, false information
Market Risk: Too high price, market crash
Judicial risk: J-Factor, restructuring fail due to judge
Holding Risk: Term effect, holding period too long
Buying Defective merchandise: buying liabilities
Funds - Managers - Strategies
Pershing Square – Bill Ackman – Activist
AQR – Clifford Asness – (everything?)
Third Point – Daniel Loeb – Activist
Greenlight – David Einhorn – Long Short Equity
Appaloosa – David Tepper – Distressed Securities
Kynikos – James Chanos – Short bias (fundamental)
Tiger Management – Julian Robertson – Global Makro
Citadel – Kenneth Griffin – (everything?) Convertible Arbitrage
Scion Capital – Michael Burry – Value
Elliot – Paul Singer – Distressed
Tudor – Paul Tudor Jones – Global Macro / LS Equity
Bridgewater – Ray Dalio – Global Macro / Risk parity
Duqueske – Druckenmiller – Global Macro/LS Equity
Short selling through fundamental analysis: What to watch
Leverage bubbles
Old technology – bad valuation
Suspect accounting
One Trick Pony – only one product (patents)
What is Enron, what did it develop to and why did it fail?
Operator of gaspipelines –> energy bank –> enron online
Creative Accounting:
Conflict of interest with other (SPE) companies
No consolidation of leverage
Insider Selling
Front loading of profits
Mark to market accounting – way to high valuation
Return on equity way smaller than cost of equity
Typical questions for hedgefunds
How do the cashflows have to change to validate the price of today?
Discretionary Macro strategy
Subjective investments
Top Down – macro-economic multiples
Watching major economic players (OPEC)
Often Anticyclical
Problems: Emotions, subjective, talents, low knowledge of business niches
Systematic Macro Strategy
(Objective) Investments
Trends and Momentum
Based on Algorithms
Problems: No robust technology, backtesting problems
Risk management in Macro strategies
Establishing Risk parameters Establishing Draw Down limit Use industry standard to measure risk: VAR/stresstest Failing of contrarians (Due diligence) Report for investors
Interest rate parity (covered, uncovered)
Interest rate parity plus currency risk
Covered: Hedge currency risk
uncovered: Don’t hedge currency risk
Convertible Bond
Convertible Arbitrage Strategy
Convertible Bond = Bond + Call Option
Convertible Bond inefficiently valuated (towards underlying asset) –> Long CB & Short Stock
–> Market neutral
Problem: Stock up + CB down –> Spread widens
Margin of safety
Difference between intrinsic value and price of a stock
Intrinsic value is the discounted value of profit of the company
Steps of value analysis
- Fundamental analysis (stock picking)
2. Watch FCF / Enterprise value / (no multiples)
Distressed debt
Bonds, which have +10% premia against the US treasuries with the same maturity.
J-Factor
A Judge influences the profit, controls negotiations and decides about restructuring
Rational trading
Defensive Trading
No loyal positions
emotion free trading
Everything up to the present is history: Where could be the price in the future?
Positionsadjustment/RISK MANAGEMENT: Reduce position size
Low Leverage
Hate/fear losing money
prudent acting
Global Macro Quantitative/Qualitative factors
key figures (GDP, M3, Inflation expectations etc. )
Fiscal/monetary policy/geo-political risks etc.
Global macro focus of trade
Momentum/Trend
Carry
Mean reversion
Mispricing
