Hedge Fund
Pooled investment vehicle using flexible strategies -> leverage, short selling, derivatives
Absolute returns with low market correlation
Privately offered or regulated -> depending on jurisdiction
Primary Elements of Hedge Funds
Private, unlisted & unregulated
Performance compensation
Diverse trading strategies
Active management due to complex & opportunistic strategies
Reasons for Growth of Hedge Funds
Low correlations with traditional assets (diversifying)
Ability to take advantage of both long and short ideas
Potential high risk-adjusted returns
Reasons for Concentration of Hedge Funds
Post GFC investor flows towards larger funds
Large funds perceived less risky —> better risk management & control systems
High costs of DD
Short Selling
HF borrows shares to sell on the market, aiming to repurchase them later at a lower price
HF pays substitute dividends to the lender while the shares are on loan
HF receives a rebate on posted collateral (interest rate minus stock-loan fee)
Exposes HF to unlimited losses / used for alpha generation or hedging
Hedge Fund Classifications
Macro and Managed Futures Funds
Event-Driven Hedge Funds
Relative Value (Arb)
Equity Hedge Funds
Macro
Managed Futures
Activist
Merger Arbitrage
DIstressed
Event-Driven Multistrat
Convertible
Volatility
Fixed Income
Relative Value Multistrat
Equity Hegde Funds
Long-short
Market Neutral
Hedge Fund Strategies
Equity Strategies
Event-driven and rel. value strategies
Absolute Return
Diversified
HF Strategy: Equity Strategy
Equity long/short
Short bias
Market risk
High SD
High correlation with equity market
HF Strategy: Event-Driven & Relative Value
Events: distressed securities, merger arb, multistrat
Rel. value: convertible bonds, volatility, fixed income, multistrat
Primary risk: event risk
Large negative skew
High kurtosis
Small profits & occasional large losses (short vol)
HF Strategy: Absolute Return
Equity market neutral
Market defensive FoFs
Low SD
Very small skew
Low kurtosis
Skill based strategy
HF Strategy: Diversified
Global macro, systematic diversified
Multistrategy / FoFs
Low drawdowns in crisis
Positive skew
Diversification benefits
Advantages Multistrat
Avoid second layer fees
Greater transparency & flexibility
Superior risk management
Self selection of managers
Advantages FoF
Manager selection skills
Reduced operational risk
Broader diversification
Last changed14 hours ago