Investment Strategies of Hedge Funds

One of the fastest growing investment sectors ever seen, hedge funds are considered by many to be exotic and inaccessible. This book provides an intensive learning experience, defining hedge funds, explaining hedge fund strategies while offering both qualitative and quantitative tools that investors need to access these types of funds. Topics not usually covered in discussions of hedge funds are included, such as a theoretical discussion of each hedge fund strategy followed by trading examples provided by successful hedge fund managers.

Filippo Stefanini is deputy Chief Investment Officer and head of Asset Allocation in Aletti Gestielle Alternative SGR, defining the asset allocation and the fund picking of 18 portfolios of hedge funds with 2.99 billion euro of assets under management as of August 1 st 2007. Filippo Stefanini is professor of Risk Management at the engineering faculty of Bergamo University in Italy . He has previously worked as a consultant for Accenture in the Asset Management and Investment Banking areas. Filippo is the author of Investment Strategies of Hedge Funds , published by John Wiley & Sons in 2006. He has also authored an Italian language book entitled, Hedge Funds: strategie di investimento and co-authored Hedge Funds: Investire per generare rendimenti assoluti? , both published by Il Sole 24 Ore.

Foreword.

Preface.

Acknowledgements.

1 A Few Initial Remarks.

1.1 What is a hedge fund?

1.2 History of hedge funds.

1.3 Proprietary trading.

1.4 The growth of the hedge fund industry.

1.5 Main characteristics of the current industry.

1.6 Capacity.

1.7 Commissions.

1.8 Industry performance overview.

1.9 The hedge fund manager.

1.10 Alpha and beta.

1.11 Investment strategies.

1.12 Explorers and frontiers.

1.13 SEC’s vigilance.

1.14 Considerations on performance sustainability.

1.15 Capacity and performance sustainability.

1.16 Ability or chance?

1.17 The importance of avoiding losses.

1.18 Decreasing returns with longer investment horizons.

1.19 Business case: A hedge fund start-up.

2 Arbitrage.

2.1 The transaction costs barrier.

2.2 ADR arbitrage.

2.3 Arbitrage between off-the-run and on-the-run thirty-year Treasury Bonds.

3 Short Selling.

3.1 A brief history of short selling.

3.2 What is short selling?

3.3 A simplified example of short selling on US markets.

3.4 Who lends securities for short selling?

3.5 Regulations governing short selling.

3.6 The risks of short selling.

3.7 Short interest and short interest ratio.

3.8 Wall Street’s alter ego.

3.9 Stock picking in short selling.

3.10 The art of contrary thinking.

3.11 Measuring the strategy’s historical performance.

3.12 Conclusions.

4 Long/Short Equity.

4.1 History of the first hedge fund.

4.2 Market exposure.

4.3 Management styles.

4.4 Specialized long/short equity funds.

4.4.1 Long/short equity technology-media-telecommunication (TMT).

4.4.2 Long/short equity biotech.

4.4.3 Long/short equity gold.

4.4.4 Long/short equity on emerging markets.

4.5 Share class arbitrage.

4.6 Pairs trading.

4.7 Covered call and covered put options sale.

4.8 Strategy’s historical performance analysis.

4.9 Equity market neutral.

4.9.1 Market neutral strategy’s historical performance analysis.

5 Merger Arbitrage.

5.1 A brief history of M&A.

5.2 Strategy description.

5.3 Risk associated with the outcome of an extraordinary corporate event.

5.4 Types of mergers and acquisitions.

5.4.1 Cash mergers or tender offers.

5.4.2 Stock swap mergers or stock-for-stock mergers.

5.4.3 Stock swap mergers with a collar.

5.4.4 Multiple bidder situations.

5.4.5 Leveraged buyouts and hostile takeovers.

5.4.6 Spin-offs.

5.5 Risk management.

5.6 Strategy’s historical performance analysis.

5.7 Conclusions.

6 Convertible Bond Arbitrage.

6.1 Why issue a convertible bond?

6.2 A brief history of convertible bonds.

6.3 The convertible bond market.

6.4 Definitions.

6.5 Quantitative models to value convertible bonds.

6.5.1 Analytical models.

6.5.2 Numerical models.

6.6 Implied volatility and historical volatility.

6.6.1 Credit spreads, implied volatility and risk appetite.

6.7 Convertible bond arbitrage.

6.7.1 Cash-flow arbitrage.

6.7.2 Volatility trading.

6.7.3 Gamma trading.

6.7.4 Credit arbitrage.

6.7.5 Skewed arbitrage.

6.7.6 Carry trade.

6.7.7 Refinancing plays.

6.7.8 Late stage restructuring plays.

6.7.9 Multi-strategy.

6.8 Mandatory convertibles.

6.9 Strategy’s historical performance analysis.

6.10 Risk control.

6.11 Conclusions.

7 Fixed Income Arbitrage.

7.1 Issuance driven arbitrage or snap trade.

7.2 Yield curve arbitrage.

7.3 Intermarket spread trading.

7.4 Futures basis trading or basis trading.

7.5 Swap spread trading.

7.6 Capital structure arbitrage.

7.7 Long/short credit or credit pair trading.

7.8 Carry trade.

7.9 Break-even inflation trades.

7.10 Cross-currency relative value trade.

7.11 Treasuries over eurodollars (TED) spread or international credit spread.

7.12 Leveraged loans.

7.13 Strategy’s historical performance analysis.

7.14 Conclusions.

8 Strategies on CDOs.

8.1 A brief history of CDOs.

8.2 Hedge fund investment strategies.

8.2.1 Carry trade.

8.2.2 Long/short structured credit.

8.2.3 Correlation trade.

8.3 Conclusions.

9 Mortgage-Backed Securities Arbitrage.

9.1 A brief history of mortgage-backed securities.

9.2 Originators of mortgage-backed securities.

9.3 The industry of mortgage-backed securities.

9.3.1 Pass-through securities.

9.3.2 Collateralized mortgage obligations.

9.3.3 “Interest Only” securities and “Principal Only” securities.

9.4 The sensitivity of mortgage-backed securities to interest rates.

9.5 Arbitrage on mortgage-backed securities.

9.6 Risk factors.

9.7 Strategy’s historical performance analysis.

9.8 Conclusions.

10 Distressed Securities.

10.1 A brief history of distressed securities.

10.2 The distressed debt market.

10.3 Bankruptcy laws.

10.4 Strategy description.

10.4.1 Securities involved.

10.4.2 Investment thesis.

10.4.3 The valuation process.

10.4.4 Hedging techniques.

10.5 Risks.

10.6 A brief consideration of the directional nature of distressed securities hedge funds.

10.7 Trade claims.

10.8 Strategy’s historical performance analysis.

10.9 Conclusions.

11 Event Driven or Special Situations.

11.1 Activist investors.

11.2 Strategy’s historical performance analysis.

12 Multi-strategy.

12.1 Multi-strategy funds.

12.2 Strategy’s historical performance analysis.

13 Managed Futures.

13.1 What is a futures contract?

13.2 A brief history of managed futures.

13.3 Managed futures strategy.

13.4 “Do storks deliver babies?” and the predictability of financial time series.

13.5 Strategy’s historical performance analysis.

13.6 Conclusions.

14 Global Macro.

14.1 A brief history of macro funds.

14.2 Investment strategies adopted.

14.3 The characteristics shared by great traders.

14.4 The legs of a trade.

14.5 The theory of reflexivity by George Soros.

14.6 Debt emerging markets.

14.7 Strategy’s historical performance analysis.

14.8 Conclusions.

15 Other Strategies.

15.1 Holding company arbitrage.

15.2 Closed-end fund arbitrage.

15.3 Statistical arbitrage.

15.4 Index arbitrage.

15.5 Volatility trading.

15.5.1 Option trading.

15.5.2 Delta hedging.

15.5.3 Variance swaps.

15.5.4 Other instruments.

15.6 Split-strike conversion.

15.7 Lending.

15.8 PIPEs or Regulation D.

15.9 Real estate.

15.10 Natural resources.

15.11 Energy trading.

15.12 Natural events.

16 Hedge Fund Performance Analysis.

16.1 Risks inherent in hedge fund investments.

16.2 Hedge fund strategies indices.

16.2.1 Benchmarking.

16.3 Statistical analysis of indices.

16.4 Value at risk.

16.5 Statistical analysis of data from the LIPPER TASS database.

Conclusions.

Bibliography.

Index.

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Investment Strategies of Hedge Funds

Summary

Author Biography

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Investment Strategies of Hedge Funds

Summary

Author Biography

Table of Contents

Supplemental Materials

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