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CFA L3 Matheus > Section 4 - R19 - Hedge Fund Strategies > Flashcards

Section 4 - R19 - Hedge Fund Strategies Flashcards

1
Q

Features of Hedge Funds (List)

A

1) Lower legal and regulatory constraints
2) Flexible mandates permitting derivatives, shorting and leverage
3) Larger investment universe
4) Lock-ups and Liquidity Gates
5) High Fee Structure

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2
Q

Hedge Fund Classification Criteria (List)

A

1) Instruments (Asset Types)
2) Trading Philosophy (Discretionary, Fundamental)
3) Types of Risks

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3
Q

Hedge Fund Categories (List)

A

1) Equity-Related
2) Event-Driven
3) Relative Value
4) Opportunistic
5) Multi-Manager

EEROM

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4
Q

Equity L/S Strategy (Pros and Cons)

A

Pros: Liquid, Net Long, Similar Returns, Lower Risk if Market Neutral

Cons: If Market Neutral, needs leverage

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5
Q

Dedicated Short Seller (Features)

A
  1. Only short side exposure
  2. Moderate short beta
  3. 60-120% net sold on an asset, while short biased is 30-60%
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6
Q

Equity Market Neutral (Features)

A
  1. Uses Leverage
  2. Attractive during bear market
  3. Most are quants
  4. Oriented to mean reversion
  5. ZERO correl
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7
Q

M&A Strategy (Features)

A
  1. Trade Anticipation or Reaction
  2. Alpha is specific
  3. E(R) of 7-12%
  4. σ = low single
  5. ↑ Sharpe
  6. Left-tail risk
  7. Insurance Like + Sell Put Option
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8
Q

Distressed Strategy (Features)

A
  1. Illiquid
  2. Market to Model Pricing
  3. Net long
  4. Alpha is deal specific
  5. Risk is higher
  6. Cyclical
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9
Q

FI Arbitrage (Features)

A
  1. ↑ Correl between securities
  2. ↓ Less Pricing Inefficiencies
  3. ↑ High Leverage (repo w/ bonds)
  4. Return from yield spreads and correl between securities
  5. Each security has a specific credit quality and convexity
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10
Q

Convertible Bond Strategy (Features)

A
  1. ↑ Leverage to Implement
  2. Long Convertible = Debt + Long Call Equity / Short Gamma and Delta Hedge
  3. Illiquid
  4. Call is OTM; ↓ Volatility = ↓ Price
  5. Usage of hedges for interest rate, credit and market risks
  6. Good performer if high level of issuances
  7. May be 300% long or 200% short (delta-hedge justifies)
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11
Q

Global Macro Strategy (Features)

A
  1. Seek to profit from investment opportunities
  2. Theme focused
  3. Usually top down and fundamentalist
  4. Anticipatory and sometimes contrarian
  5. Heterogeneous as a group
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12
Q

Managed Futures (Features)

A
  1. TSM (Time Series Momentum) and CSM (Cross Sectional Momentum)
  2. Based in Futures Options
  3. Uncorrelated w/ stocks and bonds
  4. ↑ Liquid
  5. ↑ Leveraged
  6. Cash-liquid Balance Sheet
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13
Q

Volatility Trading (Features)

A
  1. Buy cheap vol & sell expensive volatility (get premiums)
  2. Long vol offsets long equity position risks during a bear market
    3.
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14
Q

Life Settlement Strategies (Features)

A
  1. Analyze pools of life insurance contracts and buys from primary beneficiaries
  2. Surrender value offered to sellers is low
  3. Necessary that % of early death of insured person is high as per actuarial methods
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15
Q

FoF Strategy (Features)

A
  1. Slow reallocation of resources
  2. Diversification
  3. Should choose uncorrelated strategies
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16
Q

Multi-Strategy (Features)

A
  1. Potential faster tactical asset allocation and generally improved fee structure
  2. Low Vol steady returns
  3. Outperforms FoF (at least due to fees)
  4. Operational risks not diversified
17
Q

Conditional Linear Factor Models (Concept)

A

Run a linear regression to identify the hedge fund strategy. Based in the incremental exposure to risk factors.

18
Q

Difference Time Series Momentum and Cross Sectional Momentum

A

Time-Series: Long rising assets & Short falling prices. MIGHT have a short leg because this strategy only shorts those assets with negative performance. If all assets are going up, it will have NO SHORT.

Cross-Sectional: Long GROUP. Short GROUP. Will always have a short leg because this strategy shorts the bottom performing 50% of the target asset class.

19
Q

Equity HF Strategies (List)

A
  1. Long Short
  2. Dedicated Short
  3. Equity Market Neutral
20
Q

Event Driven HF Strategies (List)

A
  1. M&A
  2. Distressed
21
Q

Relative Value HF Strategies (List)

A
  1. Fixed Income Arbitrage
  2. Convertible Bond Arbitrage
22
Q

Opportunistic HF Strategies (List)

A
  1. Global Macro
  2. Managed Futures

CFA L3 Matheus (18 decks)

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