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• What is a hedge fund? A hedge fund is an alternative investment vehicle which is different from traditional investment funds in a number of ways. The legislative requirements are less restrictive for hedge funds. This allows hedge funds to use a number of financial instruments and investment tactics which are off limits to traditional investment funds. For instance, hedge funds are allowed to use high leverage and can go short in a number of markets, e.g. stock, securities, currency and commodities markets. • What is "hedging"? Hedging is another word for risk management. The fund managers apply hedging techniques in order to mitigate a certain type of risk. Types of risk hedged against include: market risk, inflation risk, long exposure risk, interest rates and large sector weightings (region, sector, company, currency). Hedging techniques include raising cash and selling short as well as buying/selling options, futures or commodity.
typically long the stock of the company being acquired and short the stock of the acquirer.a broad strategy that invests (long or short) across asset classes in anticipation of market movements or trends in interest rates. currencies.Hedge Fund Strategies • Merger Arbitrage . • Fixed Income Arbitrage . Examples of where such disparities may exist are yield curve anomalies.a strategy designed to capture pricing disparities within fixed income markets and related derivatives. .an event-driven strategy in which the arbitrageur takes a position of both companies involved in a merger or acquisition. commodity prices and equity markets. • Global Macro . volatility differences and the futures market versus the underlying bonds.
.a strategy designed to take advantage of pricing inefficiencies of the embedded option in a convertible bond. • Equity Market Neutral .a strategy designed to exploit equity price inefficiencies through balanced long and short positions that insulate the portfolio from overall market risk. Depending on the mix of long and short positions the portfolio may have a long bias or short bias. the arbitrageur would be long the convertible position and short the underlying stock. Typically.Hedge Fund Strategies • Convertible Arbitrage .the most common hedge fund strategy in which a manager takes long and short equity positions. • Long/Short .
When short selling a stock that pays dividends and the ex-dividend date passes while you are short the stock. It should also be noted that contrary to standard finance theory. If the short position begins to move against you (rise in price). you'll begin to borrow on margin for this purpose. usually a standard commission similar to that of purchasing a similar security. These will be computed and charged the same as for a regular margin debit. The brokers generally do not pass this benefit on to the retail client. the short seller often does not enjoy the benefits of the proceeds of the short sale to earn interest or reduce outstanding margin amounts. and you don't have enough funds in your cash account to cover the position.Hedge Funds QA • What are some ‘short sale’ intricacies? When a broker facilitates the delivery of a client's short sale. money will be removed from your cash account and moved to your margin account. At that time. the dividend will be deducted from your account. you'll also begin to accrue margin interest charges. the client is charged a fee for this service. unless the client is very large. If short shares continue to rise in price. .
htm#pcm • • . insurance companies. particularly in recent years as institutional investors have entered the hedge fund investment business focusing exclusively on generating stable. What are lock-up periods? The amount of time during which assets cannot be removed from the hedge fund. a number of hedge funds.org/Commonfund/Help/Glossary.Hedge Funds QA • • • • Are all hedge funds aggressive risk takers? No. http://www. Who typically invest in hedge funds? Pension funds.com/?pageid=47 http://www. fund of funds. consistent returns by employing low risk investment strategies.hedgenordic.commonfund. endowments and qualified clients. What are hurdle rates? The minimum investment return a fund must generate before it is eligible to take a performance allocation or an incentive fee.
This is a market-neutral paper portfolio exercise. remember you are the investment pro in the making. You do not need equal number of securities on each side.Hedge Fund project – some specifics • 1. you do not want a pro to do your work. 2. If you have a stock only long portfolio .about 16-20 stocks is necessary for minimal diversification. except CE funds and only if there are no comparable ETF’s – such as IRL or IFN 3. Buying a Short ETF is a short and not a long. • • . If you have ETFs you can have fewer on each side. for illustration of investment and modern portfolio theory concepts. strive for beta neutrality. I am not a financial planner. It is not to be construed as investment advice of any sorts. No mutual funds in the portfolio as well. will you hedge it with another short on the short side? Also a short ETF/Fund has a higher expense ratio. but you must have $ neutrality at the very least.
then go with them. for example ^ATDOW is the Austria index (non-tradeable). which are multiples of 100 (most of the times). Shares are traded in 'round lots' . Beta-non stationarity' problem – betas are being calculated differently by the different sites? Simple solution for now . Minor deviations around total portfolio value are expected and not a problem.since different providers use varying assumptions about how to calculate it. You cannot invest in indices – they are non-investible – an instrument has to have a bid-ask for it to be tradeable.com. Anything else will incur higher trading costs or may not be feasible. • • . Cross-check the ETF betas with those from my XL sheet.use betas from a single source . 5. 6. Multiples of 10 are OK for this project. the website that has numbers closest to mine is doing a better job. You can read my latest paper on ETF betas that discusses this. iShares. Yahoo ETF sites list ETF’s by type.Hedge Fund project – some specifics • 4. use EWO to trade/track it. The Euro such as ^DJEURO is an index – FXE is the associated index.
. When you calculate your net return at the end of semester a higher ETF fee will eat into your gross return.com/q/pr?s=spy http://www.. http://funds.com/fund_info/all_funds_profile. So you make the call. Fund expenses: The ultimate objective of this project is to simulate real market conditions that impact investor bottom line.yahoo.com/lipper/retail/reuters/expenses.most other securities in your portfolio have US market betas.asp http://finance.jhtml • • • • 8.ishares.Hedge Fund project – some specifics • 7. Various market betas: Since you are a US investor keep it simple at SP500 (SPY) as the relevant market.reuters..
com/ (click on ETF's) Other ETF resources: http://www.sectorspdr.Hedge Fund project – some weblinks • • • • • • • • • • • • • • • • • A good primer on ETF's http://finance.yahoo.html http://funds.com/ http://www.jhtml http://amex.com/correlation/ About fund expenses: http://quicktake.com/DataDefs/FundNutsAndBolts.ishares.com/etf/education http://www.com/learn/index.com/ For the ETF correlation and beta matrices : http://advancedportfoliosolutions.etfconnect.morningstar.html http://www.asp .com/aps-research.currencyshares.com/sitemap/ http://www.com/ http://etfscreen.reuters.com/lipper/retail/reuters/expenses.etftopics.
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