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Flashcards in Vorlesung Deck (86)
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The prudent man rule

The prudent man rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."


Mutual fund and broker difference to hedgefunds

Mutual fund: Pools money from many investors towards assets; daily pricing through the net asset value.
Difference to hedge fund: money is on the depot bank, not with the company.


Jones Hedgefund

Jones, father of hedge funds: wanted to leverage, but advertising for hedge funds was forbidden. No more than 99 investors, and no publication needed.
Own investment


Hedge fund benchmark

Hedgefunds do not care about benchmarks, they follow complete different strategies, To diversify the investors Portfolio.


Payment structure of a hedgefund

Payment of a hedge fund managers: 2.20. 2% initial fee and 20% performance fee.


Main Hedgefund classes

HFR strategy classifications:
Equity hedge
Event driven
Micro + CTA
Relative Value
Specialty: Multimanager funds: fund of funds
in reality: not as simple.


Beta of HF

HFRI annual investment returns are not correlated with the indices that much, however they are slightly correlated


What is institutionalization

Institutionalization of hedge funds: large part of their assets are not any more HNWIs, however institutional investors with expertise.


Name 4 types of funds

Four types of investment companies exist: mutual funds, exchange traded funds, close-end funds and unit investment trusts.

Liquid alternative funds


Futures vs. Options for hedging

futures are better than options because off call them options are not as liquid and they have no linear pay off. Additional question: is the contract volatile (liquidity premium). Protection gets more expensive if we buy the put options which are further out of the money.

Problem: Delta of Option changes with decline

Please do not forget: hedging always involves opportunity costs.


3 common features of hedgefunds (in the beginning)

They are three common features for the definition of hedge funds: first leverage, second short selling, third high-performance fees (2-20)


Common features of hedgefunds today

Today there is no universal definition of hedge funds, however there are some characteristics:

High-performance fees, 2-20
Substantial capital investments by the manager itself
Offshore structure or partnership structure
Liquidity restrictions
dynamic trading strategy
Innovation from the whole industry


Describe services of a Prime Broker

Prime brokerage: services offered by investment banks to hedge funds

Global custody services (Safekeeping of assets, clearing, settlement)
Financing of leverage
Securities lending
Capital introduction
Consulting services
Additional services (risk analytics technology, office space,…)


What is the classification problem

Classification Problem: Mutual funds are defined by asset classes - Hedgefunds are defined by dynamic trading strategies

Methodology (Systematic vs. Discretionary/ Opportunistic)
sectors (Equity Hedge: Energy / Basic material vs. Technology Healthcare)
Regions (Global, emerging markets, Asia)
Frequency: Monthly indices / Daily
Type: single strategy vs. Fund of Funds

"style drift" of a Hedge Fund is very bad


Equity Hedge Equity market neutral

Equity Hedge Equity market neutral: Qualitative techniques of analyzing price data

Factor based: systematic analysis of common relationships between securities —> beta near 0 and a lot of leverage

Statistical arbitrage/trading: exploiting priced anomalies which may an occur as a function of expected mean reversion inherent insecurity prices; high-frequency trading; technical analysis; opportunistically to exploit new information

Characteristic: net equity market exposure no greater than 10% long or short


Equity Hedge fundamental growth

Equity Hedge Fundamental growth: assessment of the valuation characteristics on the underlying companies
which are expected to have prospects for a earnings growth and capital appreciation exceeding those of the broader equity market

Companies which are experiencing or expected to experience abnormally high levels of growth in earnings, profitability, sales or marketshare


Equity Hedge Fundamental Value

Equity Hedge Fundamental Value: trade evaluation metrics
by which the manager determines them to be inexpensive and undervalued when compared with relevant benchmarks

Focused on characteristics of the firms financial statements (absolute and relative)

Typically focus on equities which currently generate high cash flow, let's trade at a discounted valuation multiples


Equity hedge Quantitative directional

Equity Hedge Quantitative directional: Factor based and statistical arbitrage/trading strategies

Typically maintain varying levels of net long or short equity market exposure over the various market cycles


Equity Hedge Short Bias

Equity Hedge Short bias: assessment of the valuation characteristics on the underlying companies with the goal of identifying overvalued companies

Maintain consistent short exposure —> expect to outperform traditional equity managers in declining equity markets

Fundamental or technical

particular focus on the identification of overvalued companies —> expect to maintain in that short equity position over various market cycles


Macro Active trading (general)

Macro Active trading: Active trading methods
Typically with high-frequency position turn over all leverage

May employ both: discretionary and systematic macro with identifiable sub strategies

Process based on systematic, quantitative evaluation of macroeconomic variables

Portfolio positioning is predicated on convergence of differentials between markets (not necessarily highly correlated)

Fundamental relationships across geographic areas (inter- and intra asset classes)

Distinct from other macro strategies in that they characteristically emphasize rapid market response to new information + High volume of turnover in liquid but frequently volatile and unstable market positions


Macro Commodity

Macro commodity: systematic commodity based on mathematical, algorithmic and technical models

Trending or momentum characteristics —> highly liquid Instruments —> shorter holding period.

Expect to have greater than 35% of portfolio in dedicated commodity exposure

Discretionary commodity strategies are reliant on the fundamental evaluation of market data, relationships and influences

May trade actively in the developed and emerging markets (focusing on absolute and relative levels on equity markets, fixed income, currency, spreads trading)


Macro Currency / Discretionary Macro Currency

Macro currency: discretionary and systematic — mathematical, algorithmic and technical models

Little or no influence of individuals over portfolio positioning

Trending or momentum characteristics in highly liquid assets — short holding periods — some try to employ counter-trend models

Greater than 35% of portfolio dedicated to currency exposure

Discretionary currency strategies rely on fundamental evaluation of market data, relationships and influences
Investment process most heavily influenced by top-down analysis of macro economic variables

May try to trade actively in developed and emerging markets


Macro discretionary thematic

Macro discretionary thematic: relying on the evaluation of market data, relationships and influences — Group of portfolio managers

Top-down analysis of macro economic variables

Trade actively in developed and emerging markets

Positions typically are predicated on the evolution of investment themes the manager expect to materialize over the relevant time frame

Contain contrarian or volatility focused components


Macro systematic diversified

Macro systematic diversified: mathematical, algorithmic and technical models

Identify opportunities in markets exhibiting trending or momentum characteristics across individual instruments

Some strategies seek to employ countertrend models —> strategies benefit most from an environment characterized by a persistent, discernible trending behavior

No greater than 35% of portfolio in either dedicated currency or commodity exposures


Event driven Activist

Event driven Activists: obtain representation on the company's board of directors

Impacting the firms policies or strategic directions

Advocate activities such as division or asset sales, corporate divestiture, dividend or share buyback, changes in management

Focused on equity companies which are engaged in the corporate transactions, security issuance/Repurchase, asset sales, division spinoffs or other catalysts

Greater than 50% of the portfolio in activist positions


Event driven credit arbitrage

Event driven credit arbitrage: opportunities in corporate fixed income secs

Senior or subordinate claims as well as bank debt and other outstanding obligations, structuring positions with little or no road credit market exposure

Limited exposure to government, silver rain, equity, combustible or other obligations —> main focus on fixed corporate obligations

Fundamental credit analysis to evaluate the likelihood of an improvement in the issuers creditworthiness

Difference to fixed income corporate strategies: involve more general Market Hedges, while Credit arbitrage in lieu of arbitrage positions with little or no net credit market exposure —> predicated on specific, anticipated idiosyncratic developments

Management typically involved with Company management


Event driven distressed/restructuring

Event driven distressed/restructuring: focused on corporate fixed income

Primarily trading at significant discounts to their value at issuance or obliged as a result of formal bankruptcy or financial market perception

Management typically in contact with company management or/and creditors

In contrast to special situations, distressed strategies employ primarily debt (greater than 60%) but also may maintain related Equity exposure


Event driven merger arbitrage

Event driven merger arbitrage: primarily announced transactions

Strategies typically have over 75% of positions in announced transactions


Event driven special situations

Event driven special situations: primarily focused on opportunities in equity.

Corporate transaction, security issuance/repurchase, asset sales, division spinoff or other catalysts

Focusing broadly on a wide spectrum of corporate lifecycle investing

Including, but not limited to distressed, bankruptcy and post bankruptcy security issuance, announced M&A, spinoffs, asset sales, etc.

Impacting an individual capital structure focusing primarily on situations identified via fundamental research —> likely to result in corporate transactions through catalyst

Primarily equity (greater than 60%) but also corporate debt exposure —> Post bankruptcy equity exposure & exit of restructuring proceedings


Relative value fixed income asset backed

Relative value fixed income asset-backed: realization of the spread between related instruments

One or multiple components of the spread is the fixed income instrument backed physical collateral or other financial obligations other than those of the specific Corporation

Attractive spread given the nature and quality of the collateral, the liquidity characteristics of the underlying instruments and on the issuance and trends in collateralized fix income instruments