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Convertible Arbitrage - Seek to exploit mispricing between a
convertible bond and its component parts.Asset Backed - Take advantage
in mispricing of ABSs, and MBSs.General Fixed Income - Focus on the
relative value within the fixed income markets.Volatility - Trade
options based on implied versus expected volatilityMulti-Strategy -
Trade relative value within and across asset classes or investments.
- Should use bid price for long positions, ask price for short
positions.- Values of non-traded securities estimated with pricing
models- Reduce market price to account for illiquidity based on size of
position.- Trading NAV is adjusted for illiquidity
- Investment companies structured as limited partnerships-
Aggressively managed - uses leverage, short/long positions, derivatives-
Goal of high returns with few investment restrictions- Limited to
qualified investors- Restrictions on redemptions - investors required to
keep money in the fund for a specified period (lockup), investors may
have to give a notice period- Limited regulation, no prospectus, can act
quickly.
- Standard deviation is not the most appropriate risk measure - fat
tails; negative skeweness; returns smoothed by model or appraised
values- Use VaR or Sortino ratio (measures downside risk)
insteadDerivatives:- performance depends on manager's skill- lack of
transparancy- illiquidity- correlations with traditional investment
returns vary over time, may increase during crisis periods.
- Potential for long-term total returns from income generation and
capital appreciation- Long-term leases with fixed rents may lessen cash
flow impact from economic shocks- Diversification benefits from less
than perfect correlation with other asset classes- Inflation hedge if
rents can quickly adjust.
- Futures price = spot price x (1+rfr) + storage cost - convenience
yield- Convenience yield = value of having physical commodity available
for use- Contago occurs when there is little or no convenience yield
-> futures price > spot price- Backwardation occurs when the
convenience yield is high -> spot price > futures priceSources of
return:- Roll yield - Difference between spot price and futures price-
Collateral yield - interest earned on the collateral posted as a
good-faith deposit for the f
- Firm a GP, outside investors are LPs- Investors provide committed
capital which fund managers draw down to invest in portfolio companies-
Management fees typically 1% to 3% of committed capital- Incentive fees
typically 20% of profits. LPs receive 80% of profits plus return of
initial investment.
- Uncorrelated with beta returns- Presumably the result of managers'
special skills in capturing non-systematic opportunities in the market.-
Strategies:- Absolute return - returns independent of market returns-
Market segmentation - move into higher returning segments more quickly-
Concentrated portfolios - less diversification (more risk) to achieve
higher returns
Merger arbitrage - going long the stock of the company being acquired
and going short the stock of the acquiring company when the
merger/acquisition is announced.Distressed/Restructuring - buy if
restructuring will increase value.Activist - Purchase sufficient equity
in order to influence a company's policies or direction.Special
Situations - Focus on opportunities in the equity of companies that are
currently engaged in restructuring activities.
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