Slides - Alternative Investments - Hedge Fund Strategies

Introduction to
Alternative Investments
Hedge Fund Strategies
1. Characteristics of Hedge Funds
2. Hedge Fund Strategies
Aggressively managed portfolio Highly leveraged
Hedge
Fund
FundFund
G
A
B
C
D
H
E
FI
Across asset classes Long/short positions
Across regions Use of derivatives

1. Characteristics of Hedge Funds 2. Hedge Fund Strategies
Let’s
negotiate the
margin
requirements
Hedge Fund
Prime Broker
Manager
Custodial services
Admin services
Money lending
Securities lending (short sale)
Trading services

Less regulated than
traditional investments
Regulators Hedge Fund take on higher risk to achieve higher returns

Hedge Fund
Return Objectives
Absolute Basis Relative Basis
against a specified benchmark
This fund seeks to This fund seeks to

achieve a return of achieve 5% above the
15% each year! S&P500 return.

Hedge Fund
Limited to __ investors
Criteria
Management fee
✦Adequate wealth
% of portfolio value Limited Partnership
✦Sufficient liquidity
Incentive fee
Managing Firm Investors ✦Investment
based on returns sophistication
General Partner Limited Partners

Hedge Fund
Less liquid than traditional investments

Alright,
you will receive
the cash after We wish to
90 days redeem the
shares
And pay a fee
Managing Firm to redeem! Investors
Lockup Period Notice Period
Min period before investors can make redemptions Number of days to redemption after notice given
(typically 30 to 90 days)

Fund of Hedge Funds
Investment company that Diversification benefits

invests in hedge funds Investors
Hedge Fund A
Allow smaller
Hedge Fund B
investors to access
May be open hedge funds in which
only to limited HedgeFund
Hedge FundC they may not be able
investors to invest directly
Hedge Fund D
Hedge Fund E

Fund of Hedge Funds
Investment company that

invests in hedge funds Investors
Hedge Fund A
Fee Additional layer of fees charged by FOF

Hedge Fund B Fee
Fee
Fee
Hedge Fund C
Fee
Fee
Hedge Fund D
Hedge Fund E

Event-Driven Strategies Relative Value Strategies Macro Strategies Equity Hedge Strategies
Profit from short-term events
Long/short
Common/Preferred Corporate
Stocks Restructuring
Debt securities
of companies
involved Corporate
Options Acquisition

Profit from short-term events
Risk:
Merger Arbitrage Announced acquisition
may not occur!
SHORT
Overpay!
Acquirer
Deal Spread
Reflects uncertainty of deal closing
LONG
Acquiree

Merger Arbitrage
Distressed/Restructuring
This firm’s shares
will soar if
successfully
restructured!
Shares
Hedge Fund Manager Firm in Distress

Merger Arbitrage
Senior Preferred
LONG Debt Shares
Situation
Junior Common
SHORT worsens
Debt Stock

Merger Arbitrage
Senior Preferred
LONG Debt Shares
Wider spreads!
→Profit! Situation
worsens
Junior Common
SHORT Debt Stock

Merger Arbitrage
Distressed/Restructuring Don’t confuse this with private
Activist Shareholder equity. We are talking about
the public equity market here.
This firm is I’ll buy
promising. I have sufficient shares
strategies that can to have influence
help grow the firm. on the firm’s
policies.
Shares
Shares
Shares
Hedge Fund Manager Public Listed Firm

Merger Arbitrage
Activist Shareholder Special Situations
Investing in firms that are engaged in

restructuring activities like:
✦issuing or repurchasing securities
✦spinning off divisions
✦selling assets
✦distributing capital

Buying a security
and selling short a related security
to profit when
pricing discrepancy is resolved
SHORT
Security
Security X related to X
LONG

Security
LONG Security X
related to X SHORT
Exploit pricing discrepancies between 2 or more related securities

between convertible bonds and the
Fixed income convertible arbitrage
common stock of the issuing companies
Fixed income asset-backed among various MBS or ABS
between fixed income securities of

Fixed income general
various types
from differences between returns volatility (implied by

Volatility
options prices) and expectations of future volatility
Multi-strategy among securities across asset classes and markets

“Top-down”
Global economic approach
Based on my trends and events Investment
macroeconomic views, decisions are made
I shall long US stocks, at macro level
short EM bonds, long
US$, and short gold.
Equities
LONG Fixed Income
SHORT Currencies
Commodities
Hedge Fund Manager

Investment
decisions are made
at macro level
LONG SHORT
Equities Investment
decisions are made
on individual
Equity derivatives securities
“Bottom-up”
Hedge Fund Manager approach

Market Neutral
Technical Analysis
Fundamental Analysis
LONG SHORT
Undervalued Overvalued
Equities Equities
Equity derivatives Equity derivatives
Hedge Fund Manager

Market Neutral
Technical Analysis
LONG SHORT
Equities
Equities Minimal
≈ Equity derivatives
exposure to
market risk
Equity derivatives
Hedge Fund Manager

Long position Short position
Approximate equal amount

Market Neutral
Quantitative Directional
Technical Analysis
LONG SHORT
Equities Equities
Minimal
Equity derivatives
≈ exposure to
market risk
Equity derivatives
Hedge Fund Manager

Long position Short position

Market Neutral
Fundamental Growth
LONG
High Growth Companies
Equities
Hedge Fund Manager

Market Neutral
Fundamental Value Fundamental Growth
LONG
Undervalued
Equities
Hedge Fund Manager

Market Neutral
Short Bias Fundamental Growth
Technical Analysis Fundamental Value
LONG SHORT
Equities
Negative
Small long position Equities market
exposure
Hedge Fund Manager Predominant short position

Multi Strategies Funds
Merger Arbitrage Fixed income convertible arbitrage Market Neutral
Distressed/Restructuring Fixed income asset-backed Quantitative Directional
Activist Shareholder Fixed income general Fundamental Growth
Special Situations Volatility Fundamental Value
Multi-strategy Short Bias

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Introduction to

Across asset classes Long/short positions

Across regions Use of derivatives

Hedge Fund Strategies

Hedge Fund Strategies

Regulators Hedge Fund take on higher risk to achieve higher returns

Hedge Fund Strategies

This fund seeks to This fund seeks to

Hedge Fund Strategies

Hedge Fund Strategies

Less liquid than traditional investments

Hedge Fund Strategies

Investment company that Diversification benefits

Hedge Fund Strategies

Investment company that

Fee Additional layer of fees charged by FOF

Hedge Fund Strategies

Profit from short-term events

Hedge Fund Strategies

Hedge Fund Strategies

Hedge Fund Manager Firm in Distress

Hedge Fund Strategies

Hedge Fund Manager Firm in Distress

Hedge Fund Strategies

Hedge Fund Strategies

Hedge Fund Manager Public Listed Firm

Hedge Fund Strategies

Investing in firms that are engaged in

Hedge Fund Strategies

Hedge Fund Strategies

Exploit pricing discrepancies between 2 or more related securities

Fixed income asset-backed among various MBS or ABS

between fixed income securities of

from differences between returns volatility (implied by

Multi-strategy among securities across asset classes and markets

Hedge Fund Strategies

LONG Fixed Income

Hedge Fund Strategies

Hedge Fund Strategies

Equity derivatives Equity derivatives

Hedge Fund Manager

Hedge Fund Strategies

Hedge Fund Manager

Hedge Fund Strategies

Hedge Fund Manager

Hedge Fund Strategies

Hedge Fund Manager

Hedge Fund Strategies

Hedge Fund Manager

Hedge Fund Strategies

Hedge Fund Manager Predominant short position

Hedge Fund Strategies

Hedge Fund Strategies

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