Hedge Fund
Characteristics
Legal/Regulatroy
- Limit access to investors with minimum income or net worth
- Regulatory oversights constraints are far less than those for regulated investment, except of liquid alts
NOTE
Liquid alts are mutual funds, close-end fund, or ETF that use hedge fund-like strategies:
- Redeem on daily basis
- More widely marketed to retail investors
- Prohibited from charging an incentive fee
- Significantly underperform similar strategy hedge funds. Illiquidity premium phenomenon cannot be easily transported into mutual fund format.
- Few investment constraints
- Large investment universe
- Aggresive investment styles
- Relatively free use of leverage
- Constraints: Lock-up, Liquidity gates, and exit window
- Relatively high fee structure: Management and incentive fees
Classification
- Single manager
- Multi-manager
- Multi-strategy
- FoF
| Category | Strategies |
|---|---|
| Equity related | - Long/short equity |
| - Dedicated short selling and short-biased | |
| - Equity market neutral | |
| Event-driven | - Merger arbitrage |
| - Distressed securities | |
| Relative value | - Fixed income arbitrage |
| - Convertible bond arbitrage | |
| Opportunistic | - Global macro |
| - Managed futures | |
| Specialist | - Volatility trading |
| - Reinsurance/Life settlements | |
| Multi-manager | - Fund-of-funds (FOF) |
| - Multi-strategy hedge funds |
Strategies
Equity Related Stratege
Long-short construction
| Strategy | Long Positions | Short Positions | Cash | Gross Exposure | Net Exposure |
|---|---|---|---|---|---|
| Long Only | 100 | 0 | 0 | 100 | 100 |
| 130/30 Long Extension | 130 | 30 | 0 | 160 | 100 |
| Market-Neutral (low risk) | 50 | 50 | 100 | 100 | 0 |
| Market-Neutral (high risk) | 100 | 100 | 100 | 200 | 0 |
| Directional (low risk) | 80 | 40 | 60 | 120 | 40 |
| Net Short | 40 | 100 | 160 | 140 | -60 |
- Average exposures of 40-60 net long, given that equity markets tend to rise in long run
- Reduce beta risk and provide additional alpha return potential
- Can be handled both by LP and liquid alts
- Liquid, diverse, with transparent mark-to-market pricing
Dedicated short-selling
- Dedicated: Taking short-only position in equities.
- Short-biased: Exposure with value-oriented and index-oriented long exposure
- Activist short selling: Take short position in a given security, then publically present short report