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Hedge Funds Trading Strategy

Hedge Funds Trading Strategy

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Published by rohan.s.patil2208
Developed a trading strategy under the guidance of Prof. Keith Black
Developed a trading strategy under the guidance of Prof. Keith Black

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Published by: rohan.s.patil2208 on Aug 10, 2009
Copyright:Attribution Non-commercial


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MSF 547: Hedge Funds
Stuart School of Business
Keywords: Discretionary spread trades, event based strategies, trade analysis
Long-Short ETFTrading Strategy
Spread Trade- Long: GEX(NYSE) and Short: NLR(AMEX), XES (AMEX)
Rohan Patil
 AbstractThe trading strategy discussed hereafter attempts to exploit the impact of the current environmental,political and technical trends on the spread between Market Vectors-Global Alternative Energy ETF(NYSE: GEX), the SPDR Oil & Gas Equipment & Services ETF (AMEX: XES)and the Market Vectors-Nuclear Energy ETF (AMEX: NLR). We shall start our analysis with the fundamentals of this strategy wherein various geopolitical aspectswill be discussed. This is followed by the technical analysis of the market prices. The penultimate sectionof this paper discusses the exit strategy and risk management aspect of the trade. In order to hedge thetrade two hedging instruments have been selected which will be discussed. This is followed by themoney management aspect of the trade.I am grateful to John Showel, Geneva Trading LLC and Prof. Russell Wojcik, IIT for their guidance.
1. Fundamental Analysis
:(a) Economic, political and environmental aspect:The issue of Global warming has been at the forefront of political and economic debates for more than adecade. Additionally, we have experienced a huge increase in the price of crude oil in the last couple of years. These two factors have compelled the economy to look for alternative solutions to fulfill theenergy requirements.In the recent past, certain energy projects in U.S. involving the use of conventional sources (i.e. coal)have been blocked citing environmental reasons.
Also, a large proportion of corn produced in U.S. isnow being used to make ethanol. Several such examples can be cited to indicate a paradigm shift in theenergy policies inclining towards alternative energies.This issue is being widely discussed in the political arena especially the presidential campaigns in 2008.After all other candidates had grown out of the competition we are left with two candidates with an
entirely different approach towards the “energy independence”.
 Democratic candidate, Sen. Obama, has championed alternative sources of energy whereas the GOPcandidate, Sen. McCain, has been emphasizing on drilling more oil and on the use nuclear energy. Basedon the current events and opinions, it is clear that the Sen. Obama has a better probability of becomingthe next president.***
 This peculiar environmental, political and economic situation leads me to be bullish on the AlternativeEnergy ETF and at the same time to be bearish on the Nuclear and Oil & Natural Gas exploration ETFs.
 ***A detailed description about their energy policies can be found here:http://en.wikipedia.org/wiki/Comparison_of_United_States_presidential_candidates,_2008 

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