Specialist Strategies
Volatility Trading In recent decades, volatility trading has emerged as a distinct asset class. Specialized hedge fund managers now focus on trading relative volatility strategies across various geographic regions and asset classes. For instance, Asia offers relatively cheap volatility…
Opportunistic Strategies: Global Macro Strategies
Global macro strategies encompass asset classes and investment instruments, including commodities, currencies, metals, fixed-income, and equities. These strategies aim to identify opportunities by examining global relationships. Global macro managers focus on specific themes, regions, or styles and typically hold views…
Relative Value Strategies: Fixed-Income Arbitrage
Fixed-income arbitrage strategies aim to capitalize on pricing inefficiencies by simultaneously taking long and short positions in various debt securities, such as government and corporate bonds, bank loans, and consumer debt (including credit card loans, student loans, and mortgage-backed securities)….
Event-driven Strategies: Merger Arbitrage
Event-driven (E.D.) hedge fund strategies involve the practice of taking positions in corporate securities and derivatives. These positions are taken with the aim of profiting from various corporate events, such as mergers and acquisitions, bankruptcies, share issuances, buybacks, capital restructurings,…
Equity Strategies: Long/Short Equity
Long/Short Equity Long/short (L/S) equity managers engage in the purchase of equities they anticipate will appreciate (long positions in undervalued companies) and the short selling of equities they believe will decline in value (short positions in overvalued companies). The primary…
An Overview and Categorization of Hedge Fund Strategies
Hedge funds are a complex aspect of alternative investments, with advantages and disadvantages. The fundamental dilemma is whether the additional fees associated with hedge fund investments are justified by the potential for increased returns (alpha) and portfolio diversification. This debate…
Long/Short, Long Extension, and Market-Neutral Portfolio Construction
Portfolio managers who have flexibility in their IPS can choose between exclusively buying equities (long-only) or a combination of buying equities and short-selling other equities simultaneously. The Merits of Long-only Investing Long-term risk premium: Achieved solely through net long investments….
The Well-Constructed Portfolio
A well-constructed portfolio aims to provide investors with promised characteristics efficiently, without guaranteeing benchmark-like results. Key elements include: Clearly defined investment process and philosophy. Alignment with investor risk and structural expectations. Implementation of a risk-efficient methodology. Maintenance of low operating…
Implications Involving Cost
Implicit Vs. Explicit Costs Implicit trading costs are also known as opportunity costs and include market impact costs. When a manager sells a significant amount of stock, the increased selling pressure can push down the security's price, resulting in a…
Assessing the Suitable Risk Level
Heuristic Risk Measures Heuristics are practical rules or general practices that come from experience rather than formal scientific analysis. They're not necessarily wrong, but they tend to be simple, one-size-fits-all solutions and may not align perfectly with modern portfolio theory….
