Hedge Funds 2 Performance, data and strategies Flashcards
(39 cards)
How much do hedge funds invest on behalf of institutional investors and wealthy individuals?
3 trillion USD
3000x1billion
Which type of returns do hedge funds try to deliver?
Absolute returns or alpha which are returns not explained by general market movements
What volatility is high for hedge funds?
Idiosyncratic volatility. Additionally, some risks may remain hidden until it’s too late.
Idiosyncratic volatility.
Idiosyncratic risk is a type of investment risk, uncertainties and potential problems that are endemic to an individual asset (like a particular company’s stock), or group of assets (like a particular sector’s stocks), or in some cases, a very specific asset class (like collateralized mortgage obligations). It is also referred to as a specific risk or unsystematic risk.
What is the Sharpe ratio?
expected return in excess of risk free rate, divided by the volatility of the excess return
another word for risk-averse investor
mean-variance investor
What does a risk-averse investor strive for in relation to the Sharpe ratio?
a maximization of the Sharpe ratio (maximization of the expected returns at a given level of risk)
What is Markowitz portfolio theory?
Modern Portfolio theory. So CAPM
What is the tangency portfolio?
The interception of the Capital Allocation Line and the efficient frontier- The tangency portfolio only contains risk assets (no risk free asset)
How can you get a portfolio on the Capital Allocation Line?
optimally get the tangency portfolio and combine it with the risk free rate
Considering CAMP why could hedge funds be interesting?
They usually do not have very high Sharpe ratios so they are under the efficient frontier. But they have a low correlation with existing asset classes, they may provide attractive diversification opportunities.
What could happen if you have a hedge fund in your portfolio?
If the hedge fund has a positive alpha, then the Capital Allocation line moves upwards and leads to a more attractive Sharpe ratio for the portfolio.
What implication would a negative alpha of a hedge fund have for you?
It would require a short position in the hedge fund
What strategies provide positive alphas relative to the market portfolio?
Overweighting small cap stocks
Overweighting value stocks
Overweighting stocks that had high returns over the past year (momentum)
What is overweight?
Overweight can also refer—in a looser sense—to an analyst’s opinion that a stock will outperform others in its sector or the market. In this sense, it is a buy recommendation, essentially. Conversely, when an analyst suggests underweighting an asset, they refer to it being less attractive to other investments.
What are value stocks?
Value stocks are classified as stocks that are currently trading below what they are really worth and will therefore provide a superior return.
Is CAPM completely accurate?
No, empirically a large number of anomalies where reported (particularly in the equity market)
-> led to a range of multiple-factor models
What is the Fama-French three factor model?
It introduces two new factors to the CAPM, which are SMB and HML.
SMB (size factor)
SMB (small minus big)
return on a portfolio of small stocks minus the return on a portfolio of large stocks (small minus big)
HML (value factor)
(high minus low)
return on a portfolio of high book-to-market value stocks minus the return on a portfolio of low book-to-market value stocks.
What is the challenge for a professional money manager?
To outperform relative to the market portfolio and the factors of Fama-French so + SMB and HML
-> so provide positive alpha in a three-factor linear regression (this is harder than a positive alpha only with CAPM)
What did Carhart introduce to evaluate mutual funds?
He introduced a 4-factor model to incorporate something that even Fama-French couldn’t explain.
What is Carports fourth factor?
momentum (MOMt)
MOM?
the return on a portfolio of past (one-year) winners minus the return on a portfolio of past losers
