LM 6: Hedge Funds Flashcards
(44 cards)
What is the ultimate goal of hedge funds?
to generate high risk-adjusted returns.
What are 5 broad categories hedge funds are placed into based on strategy? EEROM
- Equity hedge strategies
- Event-driven strategies
- Relative value strategies
- Opportunistic strategies
- Multi-manager
What kind of approach do hedge funds use for equity hedge strategies?
Bottom-up approach.
What are 5 equity hedge strategies? FFFSM
- Fundamental long/short
- Fundamental growth
- Fundamental value
- Short biased
- Market Neutral
What is a fundamental long/short and fundamental growth equity hedge strategy?
fundamental long/short: taking long or short positions depending on whether securities are trading above or below their intrinsic value.
fundamental growth: long positions in companies with fundamentals that indicate potential for growth and capital appreciation.
What is a fundamental value and short-biased equity hedge strategy?
fundamental value: trading value stocks that are undervalued
short biased: trading stocks that are overvalued due to reasons such as bad accounting, business practices, etc.
What is a market-neutral equity hedge strategy?
Long positions in undervalued equities are offset with short positions in equities that have been assessed as overvalued based on quantitative, technical, and fundamental analysis.
What are event-driven strategies for hedge funds?
seek to profit from anticipated short-term events that are likely to have a significant impact on security valuations.
What kind of approach do hedge funds use for event driven strategies?
bottom-up approach
What are 4 event-driven strategies? MDSA
- Merger arbitrage
- Distressed/restructuring
- Special situations
- Activist
What is a merger arbitrage event-driven strategy?
purchasing shares of the target company in an announced or expected merger while simultaneously shorting the acquirer’s shares.
What is a distressed/restructuring event-driven strategy?
Managers purchase the debts of companies that are on the verge of (or already in) the bankruptcy process
What are fulcrum securities?
Distressed debt instruments that are expected to be converted
What is a special situation event-driven strategy?
Managers take long equity positions in companies that are expected to take certain actions, such as share repurchases, special dividend payments, spin-offs, or asset sales.
What is an activist event-driven strategy?
Managers accumulate sufficient voting rights with the intention of gaining representation on a company’s board and having a direct influence its policies and strategic direction.
What are relative value strategies?
seek to profit from pricing discrepancies by trading related securities.
What are 4 relative value strategies?
- convertible bond arbitrage
- fixed income (general)
- fixed income (asset-backed, mortgage-backed, and high yield)
- multi-strategy
What is a convertible bond arbitrage relative value strategy?
convertible debt security, involves taking long position in convertible debt and shorting equity
What is a fixed income (general) relative value strategy?
Positions are taken based on assumptions about the relative prices of pairs of debt securities. exploit perceived mispricings in sovereign debt and investment grade corporate bonds
What is a fixed income (asset-backed, mortgage-backed, and high yield) relative value strategy?
same thing as fixed income (general) just for asset-backed, mortgage-backed, and high-yield.
What is a multi-strategy relative value strategy?
same relative value principles are applied but, rather than limiting their focus to specific market segments, managers take positions across a variety of asset classes and instruments.
What are 2 opportunistic strategies?
- macro strategies
- managed futures
What is macro strategy opportunistic strategy?
use a top-down approach, taking long and short positions based on the analysis of economic variables.
What are commodity trading advisers (CTA’s)?
hedge funds. since they have traditionally been focused on the commodity asset class.
