Resources

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Event-driven investing is an investing strategy that seeks to exploit pricing inefficiencies that may occur before or after a corporate event, such as a bankruptcy, merger, acquisition or spinoff.…

Event-Driven is also known as "corporate life cycle" investing. This involves investing in opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations, recapitalizations and share buybacks. The portfolio of some Event-Driven managers may shift in majority weighting between Risk Arbitrage and Distressed Securities, while others may take a broader scope. Instruments include long and short common and preferred stocks, as well as debt securities and options. Leverage may be used by some managers. Fund managers may hedge against market risk by purchasing S&P put options or put option spreads.…

Macro involves investing by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities. Macro managers employ a "top down" global approach, and may invest in any markets using any instruments to participate in expected market movements. These movements may result from forecasted shifts in world economies, political fortunes or global supply and demand for resources, both physical and financial. Exchange traded and over-the-counter derivatives are often used to magnify these price movements.…

Equity Non-Hedge funds are predominately long equities, although they have the ability to hedge with short sales of stocks and/or stock index options. These funds are commonly known as "stock-pickers." Some funds employ leverage to enhance returns. When market conditions warrant, managers may implement a hedge in the portfolio. Funds may also opportunistically short individual stocks. The important distinction between equity non-hedge funds and equity hedge funds is equity non-hedge funds do not always have a hedge in place. In addition to equities, some funds may have limited assets invested in other types of securities.…

Formula: (Std. Dev. of Monthly ROR) X SQRT (12) or (Std. Dev. of Quarterly ROR) X SQRT (4)…

Too many people who are interested in the financial industry think that the only hedge fund positions that are available are the 100 hour work week hedge fund analyst positions that grind you down and make you a subservient henchmen to the market. While there are lots of those positions to go around, there are also many other hedge fund positions that are the complete opposite of that and actually offer an enjoyable experience. Since each individual hedge fund is set up in its own way, it is difficult to generalize about the specific hedge fund positions that are available, but the three that most hedge funds employ are hedge fund managers, hedge fund administrators and hedge fund analysts.…

If you are looking for an investment alternative to the US stock market (compound annual return of -0.18% since January 2000) and already have quite a bit of money to invest, you may want to consider hedge funds. Mutual funds offer returns that are pretty much inline with the overall market averages, but hedge funds offer something on a whole different level. Hedge funds are a lot more aggressive and are allowed to take certain liberties that mutual funds or other managed funds are not allowed to take. Because of this, compound annual returns for successful hedge funds can be significantly greater.…

If you have been watching the news lately, you will have no doubt heard about some of the so-called "fat-cat" bankers of Wall Street who take home hedge fund salaries that make a small African countries GDP look like pocket change. But, is the hedge fund business really that lucrative? Are hedge fund salaries really that high? Should you drop out of art school and start studying quant analysis as soon as possible? While there are many great opportunities in the financial industry, it is not all it's cracked up to be.…

A successful hedge fund operation has many elements which all intermingle to form an optimal wealth accumulation and growth mechanism. When people see portrayals of hedge funds on TV and in the movies, all they really see are the guys wearing suspenders, imitating Gordon Gekko and lighting cigars with $100 bills in their spare time. But, there is a whole other side to the business, and that is hedge fund admin.…

Are you an avid stock market investor? Do you love the thrill of investing money in a certain stock, bond, or other financial derivative and watch its value skyrocket? Do you want to make more money than you ever thought possible? If so, starting a hedge fund is the perfect opportunity to change your life forever.…

It's that time of year when weary Wall Street traders take stock of exactly how much they're really valued by their banks. And a time also to cast their eyes towards their hedge fund colleagues, muttering darkly about the grass being greener on the other side. With January bonuses now having been bagged, it's a good talking point to see how they measure up to what's available on the hedge-side of the investment industry.…

A hedge fund is an alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets.…

This tabular analysis summarizes the best, worst and average performance for the trading program during time windows of varying lengths. For example, three-month time windows measure performance in all rolling three-month time periods (e.g., months one through three, two through four, etc.).…

This ratio is also a comparison of historical reward and risk and was developed by Deane Sterling Jones. The Sterling Ratio is equal to the average annual rate of return for the past three calendar years divided by the average of the maximum annual drawdown in each of those three years plus 10%.…

Formula: Each monthly rate of return = ((VAMI at end of month / VAMI at beginning of month) - 1)…

Formula: Drawdown = (1 - Valley VAMI / Peak VAMI) (X 100 for %) Example: Peak VAMI = 2000, Valley VAMI = 1500 Drawdown = 1 - 1500/2000 = .25 or 25%…

VAMI is defined as the growth in value of an average $1000 investment. VAMI is calculated by multiplying (1 + current monthly ROR) X (previous monthly VAMI). VAMI assumes the reinvestment of all profits and interest income. Incentive and Management Fees have been deducted.…

Formula: (Final VAMI / Initial VAMI - 1) (X 100 for %)…

The general idea of Style Analysis is to attempt to explain, or understand, the return stream of a given fund in terms of a set of asset classes (or style factors). Specifically, for a set of n asset classes, to try and find a corresponding set of n fixed weights (or percentages). These weights are then applied to the returns of their respective asset classes, with the hope that their sum closely approximates the returns of the given fund, for each data-period in succession and over the range of data periods as a whole. At the same time, it is desired that the composition determined by the analysis reflect the actual style of the target fund.…

Short Selling involves the sale of a security not owned by the seller, a technique used to take advantage of an anticipated price decline. To make a short sale, the seller borrows securities from a third party in order to make delivery to the purchaser. The seller returns the borrowed securities to the lender by purchasing the securities in the open market. If the seller can buy that stock back at a lower price, a profit results. If the price rises, however, a loss occurs. A short seller must generally pledge other securities or cash with the lender in an amount equal to the market price of the borrowed securities. This deposit may be increased or decreased in response to changes in the market price of the borrowed securities.…

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Sector: Technology funds emphasize investments in securities of the technology arena. Some of the sub-sectors include multimedia, networking, PC producers, retailers, semiconductor, software and telecommunications.…

Sector: Healthcare/Biotechnology funds invest in companies involved in healthcare, pharmaceutical, biotechnology and medical device areas.…

Sector: Financial is a strategy that invests in securities of bank holding companies, banks, thrifts, insurance companies, mortgage banks and various other financial services companies.…

Sector: Energy is a strategy that focuses on investment within the energy sector. Investments can be long and short in various instruments with funds either diversified across the entire sector or specializing within a sub-sector, i.e., oil field service.…

The time period in which an investor in a fund may withdraw his or her capital from the fund. For example, quarterly redemption allows an investor to withdraw capital every quarter.…

Inclusion of a trading program/fund in any particular sector is based on information contained in the trading program's/fund's disclosure documents, responses to Barclay's Fund Addition questionnaire, fund offering documents, discussion with the program/fund manager, and the opinion of BarclayHedge, Ltd. Since the categorization of market focus and trading styles is subject to change and is of necessity subjective in nature, BarclayHedge, Ltd. does not take any responsibility for including or failing to include a trading program in a particular sector.…

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by Dermot S. L. Butler The problem with writing about a topic such as starting up a hedge fund is that there are so many questions that have to be asked - for example, where do you want the fund to be established. The answer to these questions usually begs another question, so I am just warning you that this is going to be a long and, perhaps, convoluted paper, and indeed it will probably be spread over 2 months. This month will be more of a descriptive and discussion paper - next month will be more procedure and checklist orientated.…

The Sharpe Ratio is equal to compound annual rate of return minus rate of return on a risk-free investment divided by the annualized monthly standard deviation.…

Relative Value Arbitrage attempts to take advantage of relative pricing discrepancies between instruments, including equities, debt, options and futures. Managers may use mathematical, fundamental or technical analysis to determine misvaluations. Securities may be mispriced relative to the underlying security, related securities, groups of securities or the overall market. Many funds use leverage and seek opportunities globally. Arbitrage strategies include dividend arbitrage, pairs trading, options arbitrage and yield curve trading.…

Merger Arbitrage, sometimes called Risk Arbitrage, involves investment in event-driven situations such as leveraged buyouts, mergers and hostile takeovers. Normally, the stock of an acquisition target appreciates while the acquiring company's stock decreases in value. These strategies generate returns by purchasing the stock of the company being acquired, and in some instances, selling short the stock of the acquiring company. Managers may employ the use of equity options as a low-risk alternative to the outright purchase or sale of common stock. Most Merger Arbitrage funds hedge against market risk by purchasing S&P put options or put option spreads.…

Market Timing involves allocating assets among investments by switching into investments that appear to be beginning an uptrend, and switching out of investments that appear to be starting a downtrend. This primarily consists of switching between mutual funds and money market funds. Typically, trend following indicators are used to determine the direction of a fund and to identify buy and sell signals. In an up move "buy signal," money is transferred from a money market fund into a mutual fund in an attempt to capture a capital gain. In a down move "sell signal," the assets in the mutual fund are sold and moved back into the money market fund for safe keeping until the next up move. The goal is to avoid being invested in mutual funds during a market decline.…

“Managed futures” refers to an asset class offered by professional money managers who are known as “commodity trading advisors” (CTAs). CTAs are required to register with the U.S. government's Commodity Futures Trading Commission (CFTC) through the “National Futures Association” (NFA), before they can offer themselves to the public as money managers. Commodity Trading Advisors are also required to go through an FBI deep background check, and provide comprehensive disclosure documents, which are required to be updated every nine months and reviewed by the NFA before investment services can be offered. “Managed futures” is arguably the first and oldest hedge fund style, having been in existence for over 30 years.…

A time period during which a new investor in a fund may not withdraw any capital committed to the fund.…

by Jennifer Gorton, Forex Traders…

Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.…

Merger arbitrage is an investment strategy that simultaneously buys and sells the stocks of two merging companies.…

The long-bias hedge fund strategy essentially serves as an investment halfway house in between a market-neutral fund and a long-only fund. Rather than putting on positions that cancel out as found in a market neutral fund, or having substantial long exposure as in a long-only fund, a long-bias fund maintains a differing ratio of long positions (compared to short positions) that usually exceeds 40%. With this definition in mind, a hedge fund with a long/short equity strategy could transition into a long-bias hedge fund, and vice versa, depending on how its assets were allocated. It should also be noted that long-bias hedge funds emerged during the 1990s during the bull market that concomitantly saw a marked decrease in the number of short-only hedge funds. The long-bias investment model became a key investment strategy to benefit from a rising market while still affording flexibility to short certain stocks or segments in the market.…

Fixed-income arbitrage is an investment strategy that exploits pricing differentials between fixed-income securities.…

An equity long-short strategy is an investing strategy, used primarily by hedge funds, that involves taking long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value.…

Distressed securities may be an attractive investment option for sophisticated investors who are looking for a bargain and are willing to accept some risk.…

Convertible arbitrage is a type of equity long-short investing strategy often used by hedge funds.…

Hedge fund strategies are the backbone of return generation for the hedge fund community. One of the most profitable are options strategies which can generate healthy and stable returns. Options strategies range from complex volatility strategies to a simple covered call approach.…

Market-neutral hedge funds typically employ a number of different investment strategies (e.g. long and shorts) that individual hedge funds may specialize in. Although some investors consider market-neutral strategies to be similar (or even the same) as a long/short strategy, this article will distinguish between the two by focusing on key characteristics related to market-neutral strategies. At the core, market-neutral strategies focus on making concentrated bets, usually based on a perceived pricing asymmetry, while limiting general market exposure through a combination of long and short positions. The ultimate goal is to achieve a beta as close to zero as possible to protect against systematic risk. This strategy differs in kind from most long/short funds that are essentially seeking long or short exposure in the market through a series of trades.…

Hedge fund strategies are the driving force behind a hedge fund manager's ability to generate returns for his investors. One of the most prolific strategies is the global macro strategy, which focuses on investing in instruments whose prices fluctuate based on the changes in economic policies, along with the flow of capital around the globe.…

Fixed income Diversified fund may invest in a variety of fixed income strategies. While many invest in multiple strategies, others may focus on a single strategy less followed by most fixed income hedge funds. Areas of focus include municipal bonds, corporate bonds, and global fixed income securities.…

Fixed Income Convertible Bond funds are primarily long only convertible bonds. Convertible bonds have both fixed income and equity characteristics. If the underlying common stock appreciate, the convertible bond's value should rise to reflect this increased value. Downside protection is offered because if the underlying common stock declines, the convertible bond's value can decline only to the point where it behaves like a straight bond.…

The appreciation in fund performance that must be achieved before the investment manager may take a performance (incentive) fee.…

A requirement that the fund must recoup any prior losses before the investment manager may take a performance (incentive) fee. In addition to performance losses, prior losses may include any combination of fees that the investment manager charges, such as management and administrative fees.…

While hedge funds implement a number of equity-based investment strategies, the long/short equity strategy has proved to be one of the most durable over the past twenty years. Indeed, the investment strategy gained steam in the mid-1990s on the back of a bull equity market; although assets allocated to the strategy declined after the tech bubble burst in 2000, it has remained viable due to the flexibility it affords managers to reallocate assets in volatile markets.…

A fund of hedge funds is an investment vehicle whose portfolio consists of shares in a number of hedge funds.…

An emerging market hedge fund is a hedge fund that specializes its investments in the securities of emerging market countries.…

There are a number of advantages to a long-only hedge fund. Primarily, there is more room to calibrate the right investment position and greater scalability in those investments. While hedge funds shorting equities may not only find it difficult to get in a certain position but also to acquire enough shares to make the position profitable, there is less concern in maintaining a long position that can be gradually increased over time with minimal leverage. Long-only hedge funds can target certain sectors, for example small cap manufacturers with exposure to emerging markets, while hedging broader exposure to market risk. This is one key difference between most long-only hedge funds and traditional long-only funds: hedge funds do not usually invest or benchmark to a market index (except maybe as a hedge), they attempt to find specific areas of investment where alpha can be generated.…

Fixed Income Mortgage Backed funds invest in mortgage-backed securities. Many funds focus solely on AAA-rated bonds. Instruments include: government agency, government-sponsored enterprise, private label fixed- or adjustable-rate mortgage pass-through securities, fixed- or adjustable-rate collateralized mortgage obligations (CMO's), real estate mortgage investment conduits (REMICs) and stripped mortgage-backed securities (SMBSs). Funds may look to capitalize on security-specific mispricings. Hedging of prepayment risk and interest rate risk is common. Leverage may be used, as well as futures, short sales and options.…

Fixed income High-Yield managers invest in non-investment grade debt. Objectives may range from current income to acquisition of undervalued instruments. Emphasis is placed on assessing credit risk of the issuer. Some of the available high-yield instruments include extendible/reset securities, increasing-rate notes, pay-in-kind securities, split-coupon securities and usable bonds.…

Fixed Income Arbitrage is a market neutral hedging strategy that seeks to profit by exploiting pricing inefficiencies between related fixed income securities while neutralizing exposure to interest rate risk. Fixed Income Arbitrage is a generic description of a variety of strategies involving investment in fixed income instruments, and weighted in an attempt to eliminate or reduce exposure to changes in the yield curve. Managers attempt to exploit relative mispricing between related sets of fixed income securities. The generic types of fixed income hedging trades include: yield-curve arbitrage, corporate versus Treasury yield spreads, municipal bond versus Treasury yield spreads and cash versus futures.…

Equity Market Neutral investing seeks to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions. Typically, the strategy is based on quantitative models for selecting specific stocks with equal dollar amounts comprising the long and short sides of the portfolio. One example of this strategy is to build portfolios made up of long positions in the strongest companies in several industries and taking corresponding short positions in those showing signs of weakness. Another variation is investing long stocks and selling short index futures.…

The long-bias hedge fund strategy essentially serves as an investment halfway house in between a market-neutral fund and a long-only fund. Rather than putting on positions that cancel out as found in a market neutral fund, or having substantial long exposure as in a long-only fund, a long-bias fund maintains a differing ratio of long positions (compared to short positions) that usually exceeds 40%. With this definition in mind, a hedge fund with a long/short equity strategy could transition into a long-bias hedge fund, and vice versa, depending on how its assets were allocated. It should also be noted that long-bias hedge funds emerged during the 1990s during the bull market that concomitantly saw a marked decrease in the number of short-only hedge funds. The long-bias investment model became a key investment strategy to benefit from a rising market while still affording flexibility to short certain stocks or segments in the market.…

Equity Hedge investing consists of a core holding of long equities hedged at all times with short sales of stocks and/or stock index options. Some managers maintain a substantial portion of assets within a hedged structure and commonly employ leverage. Where short sales are used, hedged assets may be comprised of an equal dollar value of long and short stock positions. Other variations use short sales unrelated to long holdings and/or puts on the S&P index and put spreads. Conservative funds mitigate market risk by maintaining market exposure from zero to 100 percent. Aggressive funds may magnify market risk by exceeding 100 percent exposure and, in some instances, maintain a short exposure. In addition to equities, some funds may have limited assets invested in other types of securities.…

This is a ratio calculated by dividing the annual return by the annualized monthly standard deviation.…

This is the average time in a recovery from a drawdown measured from the low point of the drawdown to a new peak. If a trading program is in an on-going drawdown, for purposes of calculating the ART we assume that the current drawdown is over.…

Of all the investment strategies currently employed by hedge funds, none provides potential for tremendous gain (or loss) more than shorting. To be accurate, a majority of hedge funds use shorts as part of their overall strategy; however, there are three different types of hedge funds where shorts play a major role: 1) short-only hedge funds; 2) short-bias hedge funds; 3) long-short hedge funds. This article will deal with short-only and short-bias hedge funds in order to understand what shorting can add to a hedge fund's arsenal. It should also be noted that with greater innovation in the financial industry, a wider array of financial instruments has opened up new opportunities for short investors. Whereas short investors traditionally had to place positions through buying stock on margin, hedge funds can now place sophisticated shorts against equities and equities indices through derivatives (e.g. options).…

by Eric C. Hage…

This report displays the number of months in which a trading program's monthly performance historically has fallen within varying performance increments.…

Distressed Securities strategies invest in, and may sell short, the securities of companies where the security's price has been, or is expected to be, affected by a distressed situation. This may involve reorganizations, bankruptcies, distressed sales and other corporate restructuring's. Depending on the manager's style, investments may be made in bank debt, corporate debt, trade claims, common stock, preferred stock and warrants. Strategies may be sub-categorized as "high-yield" or "orphan equities." Some managers may use leverage. Fund managers may run a market hedge using S&P put options or put option spreads.…

This is the rate of return which, if compounded over the years covered by the performance history, would yield the cumulative gain or loss actually achieved by the trading program during that period.…

The Barclay CTA Index measures the composite performance of established programs. For purposes of this index, an established trading program is a trading program that has four years or more documented performance history. Once a trading program passes this four-year hurdle, its subsequent performance is included in this equally weighted and rebalanced at the beginning of each year index. The Barclay Index does not represent an actual portfolio, which could be invested in, and therefore the index performance results should be deemed to be hypothetical in nature and of comparative value only.…

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Emerging Markets funds invest in securities of companies, or the sovereign debt of developing or "emerging" countries. Investments are primarily long. "Emerging Markets" include countries in Latin America, Eastern Europe, the former Soviet Union, Africa and parts of Asia. Emerging Markets - Global funds will shift their weightings among these regions according to market conditions and manager perspectives. In addition, some managers invest solely in individual regions.…

Formula: (Compound Annual Return / Annualized Std. Dev. Mo. ROR)…

A drawdown is defined as a loss of equity from a peak to valley in a single month or period of consecutive months. The Drawdown Report presents data on the percentage drawdowns during the trading program's performance history ranked in order of magnitude of loss.…

Convertible Arbitrage involves purchasing a portfolio of convertible securities, generally convertible bonds, and hedging a portion of the equity risk by selling short the underlying common stock. Certain managers may also seek to hedge interest rate exposure under some circumstances. Most managers employ some degree of leverage ranging from zero to 6:1. The equity hedge ratio may range from 30 to 100 percent. The average grade of bond in a typical portfolio is BB-, with individual ratings ranging from AA to CCC. However, as the default risk of the company is hedged by shorting the underlying common stock, the risk is considerably better than the unhedged bond's rating indicates.…

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This ratio was developed by BarclayHedge, Ltd. In simplest terms the Barclay Ratio is equal to the trend of the VAMI divided by the standard deviation of the monthly returns. Although similar in certain respects to the Sharpe Ratio, it has a much higher correlation with percentage of profitable 12-month time windows than any other reward/risk ratio.…

Formula: (Sum ROR for each calendar year in program history)/(number of calendar years in program history) Example: ABC program…

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