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Level 86

Investment Strategies of Hedge Funds


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Relative-value strategies include...
convertible arbitrage
Event-driven strategies include...
merger arbitrage
Opportunistic strategies include...
equity hedge (long/short)
Equity hedge (long/short)
profit from the misplacing of securities - portfolio advisor perceives a discrepancy that he or she believes the market will eventually recognize
Global macro
roam the planet and seek investment opportunities
managed futures
specialist advisors known as commodity trading advisors (CTAs), who manage investing in futures contracts
Convertible arbitrage
investing in the convertible bonds and the common shares of one and the same issuer
the conversion price is higher than the share price.
At the time of issue, the option is out of the money. What does this mean?
How does convertible arbitrage work?
the hedge fund buys the convertible bonds and short sells the common shares of an issuer
In convertible arbitrage, what happens if the stock price increases?
the hedge fund will lose money on the short position in common shares, but will make a gain on the convertible bond, whose price will also have gone up. The gain will offset the loss.
In convertible arbitrate, how does the hedge fund achieve a return?
the return consists of the interest income from the convertible bond. This can be enhance by interest income on investing the proceeds of the short sale of the common shares.
merger arbitrage
risk arbitrage strategy
the main risk of merger arbitrage
that the merger does not occur
distressed securities (example)
Omni - the purchase of defaulted bonds
With distressed securities, success depends on
..being able to analyze the situation and predict its eventual outcome.
the viability of the underlying business
What factors could affect the outcome of a distressed investment?
capacity constraints
there is a ceiling on how much may be invested
In long/short, what's the typical strategy?
The hedge fund makes a profit if the long position in undervalued stocks performs better than the short position in overvalued stocks.
..the investment strategy
In hedge funds, investment risk depends on