大浩浩的笔记课堂——FRM考试学习笔记141

Topic 70 Hedge Fund

1.The introduction of hedge funds:

⑴classic problem:

Q:What would be an ideal approach for a hedge fund investor who is concerned about the problem of risk sharing asymmetry between principals and agents within the hedge fund industry?

A:Focusing on investing in funds for which the fund managers have a good portion of their own wealth invested.

⑵the differences:

Hedge funds are distinct from mutual funds:

The hedge funds:

①are private investment vehicle,not open to the general investment public

②can hold substantial short positions

③can hold leverage,managers make large bets

④are ability to employ derivatives

⑤offer very transparency

⑥generally charge an incentive fees

⑦face less financial regulation

⑶skill set:

The hedge fund manager´s sill set:

①an ability to identify profitable long as well as short opportunities in a range of asset categories.

②the organizational structure to carry short positions for extend periods of time

③the know-how to fund leveraged positions

④the risk management skill to maintain complex positions during volatile markets.

⑷database bias:

①measurement bias

②backfill bias

③selection bias(self-reporting bias)

④survivorship bias

·特别注意！

·Selection bias and survivorship bias may lead the removal of poor performance,so the performance of the hedge fund will be overvalued,the Sharpe ratio will get inflated and the volatility and correlation of the hedge fund will be undervalued.

⑸historical development:

①early days(1987—1996):

A.Hedge funds easily outperformed the SNP index.

B.There were survivorship and selection biases,more than enough to account for any measurement biases.

C.There was large losses following a change in Fed policy in 1994.

②collapse of Long Term Capital Management(LTCM) in fall of 1998:

A.The collapse of LTCM had a dramatic impact on the private world of hedge fund investors.

B.There was a significant reduction in investor.

③rapid expansion(2000—2010)

A.There was a burst of the dot-com bubble in 2001.

B.There was an arrival of institutional investors such as foundations,endowments,pension funds and insurance companies before 2007.

C.There was a decline in alpha in the 2002—2010 time period:

Managers can use investment tools to pursue alpha while sustaining a target beta for the portfolio:

a/ alpha(α):

It is the return in excess of the compensation for risk.

b/ beta(β):

It is a measure of the systematic risk of the security or portfolio relative to the market as a whole.

D.All hedge databases substantially outperformed equities,accompanied by less than half the standard deviation of equities.

2.Empirical evidence of hedge fund performance:

⑴Were the lofty expectations of early hedge fund investor fulfilled?

There are 2 major indices:

①DJ CSI→Dow Jones-Credit Suisse Broad Index

②HFRI→Hedge Fund Research Weighted Composite Index

⑵absolute return and alpha-A Roso by any other name?

①hedge fund management companies:

They are shifting form targeting outsized returns form highly leveraged bets to emphasizing the value of survival and in turn risk management.

②institutional investors:

They are just like the dominant investor group:

A.They are sophisticated.

B.The risk management,investment process,operational governance in hedge fund market are improved.

C.The benchmarking indices are created.

3.The strategies of hedge funds:

⑴from passive index strategy to active hedge fund styles:

①the difference:

The hedge fun returns have low correlation with standard asset returns,quite different from mutual fund returns.

②the reasons:

A.Transacting in securities is not correlated to conventional asset class indexes.

B.the dynamic nature of their trading strategies

⑵peer-group style

⑶return-based style:

It does not just rely on what hedge fund managers say they do,however,look also at what they actually do.

⑷top-down model vs. bottom-up model of hedge fund strategy

⑸directional style:

①definition:

It is tend to benefit from extreme moves.

②characteristics:

A.The strategies of this style are similarity.

B.These managers behave like asset allocators taking vets in different markets utilizing a range of strategies opportunistically.

So,there is low return correlation to equities.

③strategies:

A.trend-following strategy(managed futures strategy):

a/ It focuses on investments in bonds,equities,commodity futures,and currency markets around the world.

b/ Managed futures fund managers tend to employ systematic trading programs that largely rely upon historical price data and market trends.

c/ It employs a high degree of leverage because future contracts are used.

d/ CTAs tend not to have a particular bias towards being net long or net short in any particular market.

e/ It has low return correlation to equities.

f/ The payoff function is similar to a look back straddle.

g/ It uses the top-down approach.

B.global macro strategy:

a/ It makes leveraged bets on identifying miss-pricingin broad equity and fixed-income markets,interest rates,foreign exchange,and commodities.

b/ It uses top-down global approach. 

c/ It flexibility to use a broad investment mandate.

d/ These approaches may be systematic trend-following models,or discretionary in nature.

e/ It has low return correlation to equities.

⑹event-driven style:

①strategies:

A.risk arbitrage strategy(merger arbitrage strategy):

a/ It typically attempt to capture the spreads in merger or acquisition transactions.

b/ It involves purchasing shares in a target firm and selling short shares in the purchasing firm.

c/ The principal risk is usually deal risk.

d/ It exhibits nonlinear returns characteristics.

e/ It is hurt by major macro declines such as extreme moves,tail risk or large drop in equity.

B.distressed investing strategy:

a/ It purchases bonds of distressed company and sell short the stock,anticipating that the shares will eventually be worthless.

b/ It exhibits nonlinear returns characteristics.

c/ It is hurt by major macro declines such as extreme moves,tail risk or large drop in equity.

d/ The best proxy for the types of returns to expect are high-yield bonds.

②comparison:

The comparison between the risk arbitrage strategy and the distressed investing strategy:

A.the same:

a/ The strategies of this style are both exhibit nonlinear returns characteristics.

b/ The strategies of this style are both hurt by extreme moves.("tail risk")

B.the differences:

a/ merger arbitrage strategy(risk arbitrage strategy):

There is a large drop in equity.

b/ distressed investing strategy:

There is a large move of short term interest rate.

⑺relative value and arbitrage-like style:

①fixed income arbitrage strategy:

A.It attempts to generate profits by exploiting inefficiencies and price anomalies between related fixed income securities.

B.Their performance is correlated to changes in the convertible bond default spread.

②convertible arbitrage strategy:

A.It is the strategy that the investor purchases long position of convertible bond and sells short the underlying stock.

B.It creates profit opportunities irrespective of market moves.

③equity long/short strategy:

A.It is the strategy that the investor go long and short similar securities to exploit mispricings-decreases market risk and generates alpha.

B.It has the flexibility to shift investment styles.

C.Diversifying or hedging across sectors,regions and market capitalization.

D.It has directional exposure to overall market and also have exposure to long small-cap and short large-cap positions.

⑻Niche strategies:

①dedicated short bias strategy:

A.It typically takes more short positions than long positions and earn returns by maintaining net short exposure in long and short equities.

B.It takes more short positions than long positions.

C.It focus on companies with weak cash flow.

D.There is negatively correlated to equities.

②emerging markets strategy:

It invests in developing countries´ securities(currencies,debt instruments,equities and other instruments)or sovereign debt.

③equity market neutral strategy:

A.Their returns can differ dramatically across different months.

B.It appears to us that equity market neutral does not behave like a single niche strategy.

C.Return behavior suggests that different funds apply different trading strategies with a similar goal of achieving almost zero beta against a broad set of equity indices.

4.The risk of hedged funds:

⑴introduction:

In the hedge fund industry,risk sharing asymmetry between the principal(investor) and the agent(fund manager) is a concern due to variable compensation schemes.

⑵categories:

extreme market stress→risks:

①significant credit-driven tail risk:

The managed futures can deal with a convex performance profile relative to other hedge fund strategy.

②portfolio risks associated with dramatic market events

5.Where do investors go from here:

Large funds are better at retaining investors assets and staying in business than smaller funds in portfolio construction and performance trend.

6.Alpha-beta separation,replication products and fees:

⑴LAB(liquid alternative beta)

⑵FOHF(fund of hedge funds):

①It performs screening and due diligence of other funds.Fees can be extensive,and the due diligence does not always identify fraud.

②The key advantage of it is diversification benefit without large capital commitment.

大浩浩的笔记课堂之FRM考试学习笔记合集