 Hedge funds are financial partnerships that use pooled funds and

employ different strategies to earn active returns for their investors.

 These funds may be managed aggressively or make use of derivatives
and leverage to generate higher returns.
 Hedge fund strategies include long-short equity, market neutral,
volatility arbitrage, and merger arbitrage.
 They are generally only accessible to accredited investors.

In a hedge fund, limited partners contribute funding for the assets while the
general partner manages the fund according to its strategy. 

Accredited or Qualified Investors

Hedge funds investors have to meet certain net worth requirements—

generally, a net worth exceeding $1 million  or an annual income over
$200,000 for the previous two years.

Hedge funds charge both an expense ratio and a performance fee. The
common fee structure is known as two and twenty (2 and 20)—a 2% asset
management fee and a 20% cut of generated gains.

Popular Hedge Fund Strategies

Long/Short Equity: Long/short equity works by exploiting profit opportunities

in both potential upside and downside expected price moves. This strategy
takes long positions in stocks identified as being relatively underpriced while
selling short stocks that are deemed to be overpriced.

Equity Market Neutral: Equity market neutral (EMN) describes an

investment strategy where the manager attempts to exploit differences in
stock prices by being long and short an equal amount in closely related
stocks. These stocks may be within the same sector, industry, and country, or
they may simply share similar characteristics such as market capitalization
and be historically correlated. EMN funds are created with the intention of
producing positive returns regardless of whether the overall market is bullish
or bearish. 
 Merger Arbitrage: Merger Arbitrage or risk arb involves simultaneously
purchasing and selling the stocks of two merging companies to create
riskless profits. A merger arbitrageur reviews the probability of a merger not
closing on time or at all.

Global Macro: A global macro strategy bases its holdings primarily on the

overall economic and political views of various countries or their
macroeconomic principles. Holdings may include long and short positions in
equity, fixed income, currency, commodities, and futures markets.

Volatility Arbitrage: Volatility arbitrage attempts to profit from the difference

between the forecasted future price-volatility of an asset, like a stock, and the
implied volatility of options based on that asset. It may also look to volatility
spreads to either widen or narrow to predicted levels. This strategy employs
options and other derivative contracts.

Convertible Bond Arbitrage: Convertible bond arbitrage involves taking

simultaneous long and short positions in a convertible bond and its underlying
stock. The arbitrageur hopes to profit from movement in the market by having
the appropriate hedge between long and short positions. 

Advantages of Hedge Funds

Hedge funds offer some worthwhile benefits over traditional investment
funds. Some notable benefits of hedge funds include:

 Investment strategies that can generate positive returns in both rising

and falling equity and bond markets 
 The reduction of overall portfolio risk and volatility in balanced portfolios
 An increase in returns
 A variety of investment styles that provide investors the ability to
precisely customize an investment strategy
 Access to some of the world's most talented investment managers

Pros
 Profits in rising and falling markets

 Balanced portfolios reduce risk and volatility

 Several investment styles to choose from

 Managed by the top investment managers

Cons
 Losses can be potentially large

 Less liquidity than standard mutual funds

 Locks up funds for extended periods

 Use of leverage can increase losses

Disadvantages of Hedge Funds

Hedge funds, of course, are not without risk as well:

 Concentrated investment strategy exposes them to potentially huge

losses.
 Hedge funds tend to be much less liquid than mutual funds.
 They typically require investors to lock up money for a period of years.
 The use of leverage or borrowed money can turn what would have
been a minor loss into a significant loss.

Different between hedge funds and mutual funds

Mutual funds are offered by institutional fund managers with a variety of
options for retail and institutional investors. Hedge funds target high-net-worth
investors. These funds require that investors meet specific accredited
characteristics.

KEY TAKEAWAYS

 Mutual funds are regulated investment products offered to the public

and available for daily trading.
 Hedge funds are private investments that are only available to
accredited investors.
 Hedge funds are known for using higher risk investing strategies with
the goal of achieving higher returns for their investors.
Hedge funds differ from mutual funds and hedge funds are not as strictly
regulated by the Securities and Exchange Commission  (SEC) as mutual
funds are
A hedge fund can invest in land, real estate, stocks, derivatives, and
currencies while mutual funds use stocks or bonds as their instruments for
long-term investment strategies.
Unlike mutual funds where an investor can elect to sell shares at any time,
hedge funds typically limit opportunities to redeem shares and often impose
a locked period of one year before shares can be cashed in.

 Hedge funds are alternative investments that use pooled money and a
variety of tactics to earn returns for their investors.
 Private equity funds invest directly in companies, by either purchasing
private firms or buying a controlling interest in publicly traded
companies.
Key Differences
1. Time Horizon: Since hedge funds are focused on primarily liquid assets,
investors can usually cash out their investments in the fund at any time. In
contrast, the long-term focus of private equity funds usually dictates a
requirement that investors commit their funds for a minimum period of time,
usually at least three to five years, and often from seven to 10 years.

2. Investment Risk: There is also a substantial difference in risk level

between hedge funds and private equity funds. While both practice risk
management by combining higher-risk investments with safer investments,
the focus of hedge funds on achieving maximum short-term profits
necessarily involves accepting a higher level of risk.

3. Lock-up and Liquidity: Both hedge funds and private equity typically require

large balances, anywhere from $100,000 to upwards of a million dollars or
more per investor. Hedge funds may then lock those funds up for a period of
months to a year, preventing investors from withdrawing their money until that
time has elapsed. This lock-up period allows the fund to properly allocate
those monies to investments in their strategy, which could take some time.
The lock-up period for a private equity fund will be far longer, such as three,
five, or seven years. This is because a private equity investment is less liquid
and needs time for the company being invested in to turn around.
4. Investment Structure: Most hedge funds are open-ended, meaning that
investors can continually add or redeem their shares in the fund at any time.
Private equity funds, on the other hand, are closed-ended, meaning that new
money cannot be invested after an initial period has expired

A pitchbook is a presentation that describes the firm and its fund strategy,
and often provides details on the manager's strategy and process,
biographies of firm personnel and performance history.

Some specific types of investment risk include:

Style Drift: Style drift occurs when a manager strays from the fund's stated
goal or strategy to enter a hot sector or avoid a market downturn. Although
this may sound like good money management, the reason an investment was
made in the first place in the fund was due to the manager's stated expertise
in a particular sector/strategy/etc., so abandoning his or her strength is
probably not in the investors' best interests.

Overall Market Risk

Fraud Risk

Operational Risk

A prime brokerage is a bundled group of services that investment banks and

other financial institutions offer to hedge funds and other large investment
clients that need to be able to borrow securities or cash in order to engage
in netting to achieve absolute returns. The services provided under prime
brokering include securities lending, leveraged trade execution, and cash
management, among other things
 Prime brokers provide a wide variety of custodial and financial services to
their hedge fund clients, including acting as an intermediary between hedge
funds and two key counterparties.

What Is the Difference Between a Broker and Prime Broker?

A broker is an individual or entity that facilitates the purchase or sale of

securities, such as the buying or selling of stocks and bonds for an
investment account. A prime broker is a large institution that provides a
multitude of services, from cash management to securities lending to risk
management for other large institutions.

What Is Margin in Prime Brokerage?

Margin is when a prime broker lends money to a client so that they can
purchase securities. It is also known as margin financing. The prime broker
has no risk on the underlying positions, only on the ability of the client to
make margin payments. Margin terms are also agreed upon beforehand to
determine any lending limits.

Margin Trading
Advantages
 May result in greater gains due to leverage

 Increases purchasing power

 Often has more flexibility than other types of loans

 May be self-fulfilling opportunity cycle where increases in collateral value

further increase leverage opportunities

Disadvantages
 May result in greater losses due to leverage

 Incurs account fees and interest charges

 May result in margin calls which require additional equity investments

 May result in forced liquidations which result in the sale of securities (often at
a loss)
Corporate actions
1) Dividends
2) Rights issue
When a company needs additional equity capital, it has two choices – ask more money from
existing shareholders or go for fresh set of investors. If company chooses latter i.e. issues shares
to fresh set of investors, proportionate holding of existing shareholders gets diluted. For
example,
a company may have 10 lakhs shares of Rs.10 each, amounting to an issued and paid-up capital
of Rs. 1 crore. If it issues another 10 lakhs shares to fresh set of investors, to increase its capital,
the proportion held by existing shareholders will come down by half, as the issued and paid up
capital has doubled. This is called as dilution of holdings. To prevent this, Companies Act
requires
that a company which wants to raise more capital through an issue of shares must first offer
them to the existing shareholders and such an offer of shares is called a rights issue.

3) Bonus issue
A bonus issue, also known as equity dividend, is an alternative to cash dividend. Bonus
shares are
issued to the existing shareholders by the company without any consideration from
them. The
reserves lying in the books of the company (shareholders’ money) gets transferred to
another
head i.e. paid-up/subscribed capital. The shareholders do not pay anything for these
shares and
there is no change in the value of their holdings in the pre and post-bonus stages. The
issuance
of bonus shares is more to influence the psychology of investors without any economic
impact.

4) Stock split
A stock split is a corporate action where the face value of the existing shares is reduced
in a
defined ratio. A stock split of 1:5 means split of an existing share into 5 shares.
Accordingly, face
value of shares will go down to 1/5th of the original face value
Companies consider splitting their shares if prices of their shares in the secondary
market are
seen to be very high restricting the participation by investors. As price per share comes
down
 post-split, share split leads to greater liquidity in the market.

5) Share consolidation
Share consolidation is the reverse of stock split. Companies consider consolidating their shares
if prices of their shares in the secondary market
are seen to be very low effecting the perception of investors. An increase in the price per share
post- consolidation, leads to better perception among the market participants about the
company’s prospects.

Types of bonds
1) ZCB
2) Floating rate bonds
3) Convertible bond
4) Amortization bond - Bonds usually pay interest during the tenor and the principal is repaid as
a bullet payment upon
maturity. However, there is a type of bond, known as ‘Amortization Bond’, in which each
payment carries interest and some portion of the principal as well. Housing loans, auto loans
and
consumer loans are an example of this type of bond, in which every month the borrower pays
the same amount (Equated Monthly Instalment – EMI) but each month the composition of this
EMI is different with initially interest forming a larger part and later principal forming a larger
part.

5) Callable bond - Callable bonds allow the issuer to redeem the bonds prior to their original
maturity date. In other
words, bonds which have embedded call option in them are known as Callable Bonds. This
feature poses a risk for investors but is beneficial for the issuers.
An embedded call option gives the issuer the right to call back the bond before maturity. When
interest rates fall, the issuer would be in a position to raise the same amount of loan, at a lower
interest rate. It is to the advantage of the issuer to redeem the existing high-cost bond before
maturity and replace it with a new low cost bond. To compensate for the risk to investors,
Callable
Bonds usually have high coupons and they are also valued not as per YTM but as per Yield To
Call
(YTC – which means the markets assume that the bond will compulsorily be called back on the
specified call date).
6) Puttable bonds - A Puttable bond gives the investor the right to seek redemption from the
issuer before the
original maturity date. These bonds have embedded Put options in them. In this case, the risk is
on the issuer, as the investor can, at any point of time give the bond back to the issuer and ask
for his principal, earlier than maturity. This would mean cash flow problems for the issuer.
Investors would exercise their right to put the bond back to the issuer when interest rates start
rising. They would simply ask for their money earlier than maturity and reinvest that at a higher
rate.

7) Payment in kind bonds

What Is Net Asset Value (NAV)?

Net Asset Value is the net value of an investment fund's assets less its
liabilities, divided by the number of shares outstanding. Most commonly used
in the context of a mutual fund or an exchange-traded fund (ETF), NAV is the
price at which the shares of the funds registered with the U.S. Securities and
Exchange Commission (SEC) are traded.

What Are the Trading Timelines for NAV?

While NAV is computed and reported as of a particular business date, all of
the buys and sell orders for mutual funds are processed based on the cutoff
time at the NAV of the trade date. If regulators mandate a cutoff time of 1:30
p.m., then buy and sell orders received before 1:30 p.m. will be executed at
the NAV of that particular date. Any orders received after the cutoff time will
be processed based on the NAV of the next business day.

What Is the Difference Between NAV and Shareholder Equity?

Equity is calculated including intangible assets, which can include items like
patents, while NAV is calculated using only tangible assets.
What Is Indicative Net Asset Value (iNAV)?
Indicative net asset value (iNAV) is a measure of the intraday net asset
value (NAV) of an investment. INAV is reported approximately every 15
seconds. It gives investors a measure of the value of the investment
throughout the day.

 T-bonds mature in 20 or 30 years and offer the highest interest

payments bi-annually.
 T-notes mature anywhere between two and 10 years, with bi-annual
interest payments, but lower yields.
 T-bills have the shortest maturity terms—from four weeks to one year.

 The record date is set by the board of directors of a company and

refers to the date by which investors must be on the company's books
in order to receive a stock's dividend.
 An ex-dividend date is set by stock exchange rules and is usually one
business day before the record date.1
 If a stock purchase is made on the ex-dividend date rather than before
it, then the seller will receive the recently declared dividend for that
stock.
 A stock's price can drop by the amount of the declared dividend on the
ex-dividend date.

Record Date
The record date, which is set by a company's board of directors, is the
date on which the company compiles a list of shareholders of the stock for
which it has declared a dividend. This list is used to determine the
shareholders entitled to receive the dividend

Ex-Dividend Date
The ex-date is usually one business day before the record date. Investors
who purchase shares any day before the ex-dividend date will be
documented as owners of shares on the record date. That means they'll be
entitled to receive the dividend payment. Investors who purchase shares on
or after the ex-dividend date won't be recognized as shareowners on the
record date. Instead, the seller will still be the owner of the record and will
receive the dividend payment.
Here's how the record date and ex-dividend date would work in the overall
dividend payout process.

 Declaration Date Ex-Dividend Date Record Date  Payable Date

February 4 February 17 February 18 March 14

What Is a Credit Default Swap (CDS)?

A credit default swap (CDS) is a financial derivative that allows an investor to
swap or offset their credit risk with that of another investor. To swap the risk
of default, the lender buys a CDS from another investor who agrees to
reimburse them if the borrower defaults.

Most CDS contracts are maintained via an ongoing premium payment similar

to the regular premiums due on an insurance policy. A lender who is worried
about a borrower defaulting on a loan often uses a CDS to offset or swap that
risk.

Advantages Explained

 Reduces risk to lenders: CDSs can be purchased by the lender,

which acts as a form of insurance designed to protect the lender and
pass the risk on to the issuer.
 No underlying asset exposure: You're not required to purchase
underlying fixed-income assets.
 Sellers can spread risk: CDSs pass the risk of defaulting on payments
to the issuer. They can also sell multiple swaps to spread risk further.

Disadvantages Explained

 Can give lenders and investors a false sense of security:

Investment insurance makes investors feel they don't have any risk with
the investment.
  Traded over-the-counter: While CDSs reduce risk, they are prone to
additional risk because they are traded on OTC markets.
 Seller inherits substantial risks: The CDS seller inherits the risk of
the borrower defaulting.

 Asset-backed securities (ABS) are created by pooling together non-

mortgage assets, such as student loans. Mortgage-backed securities
(MBS) are formed by pooling together mortgages. 
 ABS and MBS benefit sellers because they can be removed from the
balance sheet, allowing sellers to acquire additional funding.
 Both ABS and MBS have prepayment risks, though these are
especially pronounced for MBS. 
 ABS also have credit risk, where they use senior-subordinate structures
(called credit tranching) to deal with the risk.
 Valuing ABS and MBS can be done with various methods, including
zero-volatility and option-adjusted spreads. 

Describe some trends in M&A deals recently.

Explain a credit default swap and an interest rate swap.
Whats the difference between GO bonds and revenue bonds?
General obligation, or GO, bonds are backed by the general revenue of the
issuing municipality, while revenue bonds are supported by a specific revenue
source, such as income from a toll road, hospital, or higher-education system.

Explain the difference between contango and forwardation.

Contango is a situation where the futures price of a commodity is higher
than the spot price. Contango usually occurs when an asset price is
expected to rise over time. That results in an upward sloping forward curve.
Future price > spot price
 A market is "in backwardation" when the futures price is below the spot
price for a particular asset. 

Future price < spot price

Top hedge funds

Bridgewater Associates
Renaissance Technologies
Man Group
AQR Capital Management
Two Sigma

Some examples of hedge funds include names like

Munoth Hedge Fund,

Forefront Alternative Investment Trust,

Quant First Alternative Investment Trust

IIFL Opportunities Fund.