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Investment Strategies of Hedge Funds

Book Description

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.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Foreword
  4. Preface
  5. Acknowledgments
  6. About the Author
  7. Chapter 1 - A Few Initial Remarks
    1. 1.1 WHAT IS A HEDGE FUND?
    2. 1.2 HISTORY OF HEDGE FUNDS
    3. 1.3 PROPRIETARY TRADING
    4. 1.4 THE GROWTH OF THE HEDGE FUND INDUSTRY
    5. 1.5 MAIN CHARACTERISTICS OF THE CURRENT INDUSTRY
    6. 1.6 CAPACITY
    7. 1.7 COMMISSIONS
    8. 1.8 INDUSTRY PERFORMANCE OVERVIEW
    9. 1.9 THE HEDGE FUND MANAGER
    10. 1.10 ALPHA AND BETA
    11. 1.11 INVESTMENT STRATEGIES
    12. 1.12 EXPLORERS AND FRONTIERS
    13. 1.13 SEC’S VIGILANCE
    14. 1.14 CONSIDERATIONS ON PERFORMANCE SUSTAINABILITY
    15. 1.15 CAPACITY AND PERFORMANCE SUSTAINABILITY
    16. 1.16 ABILITY OR CHANCE?
    17. 1.17 THE IMPORTANCE OF AVOIDING LOSSES
    18. 1.18 DECREASING RETURNS WITH LONGER INVESTMENT HORIZONS
    19. 1.19 BUSINESS CASE: A HEDGE FUND START-UP
  8. Chapter 2 - Arbitrage
    1. 2.1 THE TRANSACTION COSTS BARRIER
    2. 2.2 ADR ARBITRAGE
    3. 2.3 ARBITRAGE BETWEEN OFF-THE-RUN AND ON-THE-RUN THIRTY-YEAR TREASURY BONDS
  9. Chapter 3 - Short Selling
    1. 3.1 A BRIEF HISTORY OF SHORT SELLING
    2. 3.2 WHAT IS SHORT SELLING?
    3. 3.3 A SIMPLIFIED EXAMPLE OF SHORT SELLING ON US MARKETS
    4. 3.4 WHO LENDS SECURITIES FOR SHORT SELLING?
    5. 3.5 REGULATIONS GOVERNING SHORT SELLING
    6. 3.6 THE RISKS OF SHORT SELLING
    7. 3.7 SHORT INTEREST AND SHORT INTEREST RATIO
    8. 3.8 WALL STREET’S ALTER EGO
    9. 3.9 STOCK PICKING IN SHORT SELLING
    10. 3.10 THE ART OF CONTRARY THINKING
    11. 3.11 MEASURING THE STRATEGY’S HISTORICAL PERFORMANCE
    12. 3.12 CONCLUSIONS
  10. Chapter 4 - Long/Short Equity
    1. 4.1 HISTORY OF THE FIRST HEDGE FUND
    2. 4.2 MARKET EXPOSURE
    3. 4.3 MANAGEMENT STYLES
    4. 4.4 SPECIALIZED LONG/SHORT EQUITY FUNDS
    5. 4.5 SHARE CLASS ARBITRAGE
    6. 4.6 PAIRS TRADING
    7. 4.7 COVERED CALL AND COVERED PUT OPTIONS SALE
    8. 4.8 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    9. 4.9 EQUITY MARKET NEUTRAL
  11. Chapter 5 - Merger Arbitrage
    1. 5.1 A BRIEF HISTORY OF M&A
    2. 5.2 STRATEGY DESCRIPTION
    3. 5.3 RISK ASSOCIATED WITH THE OUTCOME OF AN EXTRAORDINARY CORPORATE EVENT
    4. 5.4 TYPES OF MERGERS AND ACQUISITIONS
    5. 5.5 RISK MANAGEMENT
    6. 5.6 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    7. 5.7 CONCLUSIONS
  12. Chapter 6 - Convertible Bond Arbitrage
    1. 6.1 WHY ISSUE A CONVERTIBLE BOND?
    2. 6.2 A BRIEF HISTORY OF CONVERTIBLE BONDS
    3. 6.3 THE CONVERTIBLE BOND MARKET
    4. 6.4 DEFINITIONS
    5. 6.5 QUANTITATIVE MODELS TO VALUE CONVERTIBLE BONDS
    6. 6.6 IMPLIED VOLATILITY AND HISTORICAL VOLATILITY
    7. 6.7 CONVERTIBLE BOND ARBITRAGE
    8. 6.8 MANDATORY CONVERTIBLES
    9. 6.9 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    10. 6.10 RISK CONTROL
    11. 6.11 CONCLUSIONS
  13. Chapter 7 - Fixed Income Arbitrage
    1. 7.1 ISSUANCE DRIVEN ARBITRAGE OR SNAP TRADE
    2. 7.2 YIELD CURVE ARBITRAGE
    3. 7.3 INTERMARKET SPREAD TRADING
    4. 7.4 FUTURES BASIS TRADING OR BASIS TRADING
    5. 7.5 SWAP SPREAD TRADING
    6. 7.6 CAPITAL STRUCTURE ARBITRAGE
    7. 7.7 LONG/SHORT CREDIT OR CREDIT PAIR TRADING
    8. 7.8 CARRY TRADE
    9. 7.9 BREAK-EVEN INFLATION TRADES
    10. 7.10 CROSS-CURRENCY RELATIVE VALUE TRADE
    11. 7.11 TREASURIES OVER EURODOLLARS (TED) SPREAD OR INTERNATIONAL CREDIT SPREAD
    12. 7.12 LEVERAGED LOANS
    13. 7.13 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    14. 7.14 CONCLUSIONS
  14. Chapter 8 - Strategies on CDOs
    1. 8.1 A BRIEF HISTORY OF CDOS
    2. 8.2 HEDGE FUND INVESTMENT STRATEGIES
    3. 8.3 CONCLUSIONS
  15. Chapter 9 - Mortgage-Backed Securities Arbitrage
    1. 9.1 A BRIEF HISTORY OF MORTGAGE-BACKED SECURITIES
    2. 9.2 ORIGINATORS OF MORTGAGE-BACKED SECURITIES
    3. 9.3 THE INDUSTRY OF MORTGAGE-BACKED SECURITIES
    4. 9.4 THE SENSITIVITY OF MORTGAGE-BACKED SECURITIES TO INTEREST RATES
    5. 9.5 ARBITRAGE ON MORTGAGE-BACKED SECURITIES
    6. 9.6 RISK FACTORS
    7. 9.7 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    8. 9.8 CONCLUSIONS
  16. Chapter 10 - Distressed Securities
    1. 10.1 A BRIEF HISTORY OF DISTRESSED SECURITIES
    2. 10.2 THE DISTRESSED DEBT MARKET
    3. 10.3 BANKRUPTCY LAWS
    4. 10.4 STRATEGY DESCRIPTION
    5. 10.5 RISKS
    6. 10.6 A BRIEF CONSIDERATION OF THE DIRECTIONAL NATURE OF DISTRESSED SECURITIES HEDGE FUNDS
    7. 10.7 TRADE CLAIMS
    8. 10.8 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    9. 10.9 CONCLUSIONS
  17. Chapter 11 - Event Driven or Special Situations
    1. 11.1 ACTIVIST INVESTORS
    2. 11.2 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
  18. Chapter 12 - Multi-Strategy
    1. 12.1 MULTI-STRATEGY FUNDS
    2. 12.2 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
  19. Chapter 13 - Managed Futures
    1. 13.1 WHAT IS A FUTURES CONTRACT?
    2. 13.2 A BRIEF HISTORY OF MANAGED FUTURES
    3. 13.3 MANAGED FUTURES STRATEGY
    4. 13.4 “DO STORKS DELIVER BABIES?” AND THE PREDICTABILITY OF FINANCIAL TIME SERIES
    5. 13.5 STRATEGY’S HISTORICAL PERFORMANCE ANALYSIS
    6. 13.6 CONCLUSIONS
  20. Chapter 14 - Global Macro
    1. 14.1 A BRIEF HISTORY OF MACRO FUNDS
    2. 14.2 INVESTMENT STRATEGIES ADOPTED
    3. 14.3 THE CHARACTERISTICS SHARED BY GREAT TRADERS
    4. 14.4 THE LEGS OF A TRADE
    5. 14.5 THE THEORY OF REFLEXIVITY BY GEORGE SOROS
    6. 14.6 DEBT EMERGING MARKETS
    7. 14.7 STRATEGY’S HISTORICAL PERFORMANCE
    8. 14.8 CONCLUSIONS
  21. Chapter 15 - Other Strategies
    1. 15.1 HOLDING COMPANY ARBITRAGE
    2. 15.2 CLOSED-END FUND ARBITRAGE
    3. 15.3 STATISTICAL ARBITRAGE
    4. 15.4 INDEX ARBITRAGE
    5. 15.5 VOLATILITY TRADING
    6. 15.6 SPLIT-STRIKE CONVERSION
    7. 15.7 LENDING
    8. 15.8 PIPES OR REGULATION D
    9. 15.9 REAL ESTATE
    10. 15.10 NATURAL RESOURCES
    11. 15.11 ENERGY TRADING
    12. 15.12 NATURAL EVENTS
  22. Chapter 16 - Hedge Fund Performance Analysis
    1. 16.1 RISKS INHERENT IN HEDGE FUND INVESTMENTS
    2. 16.2 HEDGE FUND STRATEGIES INDICES
    3. 16.3 STATISTICAL ANALYSIS OF INDICES
    4. 16.4 VALUE AT RISK
    5. 16.5 STATISTICAL ANALYSIS OF DATA FROM THE LIPPER TASS DATABASE
  23. Chapter 17 - Conclusions
  24. Bibliography
  25. Index