Equity Long Short - Hedge Fund Strategies

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A brief overview of a hedge fund strategy used in alternative investment markets.

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Equity Long Short - Hedge Fund Strategies

  1. 1. Hedge Fund Strategies Equity long short
  2. 2. Equity long short Index: 1. Definition 2. Advantage versus Disadvantage 3. Important variant of equity long/short: Pairs trading 4. Pairs trading related to statistical arbitrage 5. Properties 6. Behavior
  3. 3. 1. Definition Equity Long Short: rely on a combination of short and long positions in order to partially hedge the risk of adverse market-wide moves. (Donald & Lacey, 2003)
  4. 4. 2. Advantage versus Disadvantage Advantage: While still focussing primarily on stock-selection opportunities, increases the flexibility of the manager to choose net-short or net-long (negative beta or positive beta) market exposure. Disadvantage: it is no longer clear how the hedge fund allocation affects overall portfolio risk. (Connor & Lasarte,n.d.)
  5. 5. 3. Important variant of equity long/short: Pairs trading According Connor & Lasarte (n.d.): Pairs trading is an important variant of equity long/short, and consists of the combined purchase and sale of two similar securities, where one security is overvalued relative to the other.
  6. 6. 3. Important variant of equity long/short: Pairs trading Gatev, Goetzmann and Rouwenhorst (1999) based an algorithm to choose pairs with the same or nearly the same state prices historically. Then they devise a rading strategy that took advantage of any deviation of the spread between the pairs. (Gatev et. al 2006)
  7. 7. 4. Pairs trading related to statistical arbitrage According Connor & Lasarte (n.d.): Pairs trading is related to the more complex strategy statistical arbitrage Statistical arbitrage: while hedging against all pervasive sources of risk, investor seeks to exploit a pricing discrepancy between related securities.
  8. 8. 5. Properties The short position serves the following purposes: Profit interest on the short position while collecting the short rebate; Alpha generation; Hedging of market risk - Managers may use options and futures to hedge their positions; - Managers’ processes may : . - shift from value to growth, from small to medium to large capitalization stocks; - be either bottom-up or top-down and may . (Meziani, n.d.)
  9. 9. 6. Behavior According Meziani (n.d.) , another critical element to understanding this funds is the degree of betas on different market conditions. High beta variability may indicate several things: A stock--picking fund manager does not manage beta because the investor is concerned primarily with the fundamental characteristics of the stocks in the portfolio; The manager consistently includes different securities from those in the benchmark index;
  10. 10. References Connor, G. and Lasarte, T., n.d., ‘An Overview of Hedge Fund Strategies’, International Asset Management; Donald,E. and Lacey, Jr., 2003, ‘Democratizing the hedge fund: Considering the Advent of Retail Hedge Funds’, Third Year Paper, Harvard Law School; Meziani(n.d.),‘Equity Long/Short Hedge Funds: Properties and Behavior’, Standard & Poor’s (S&P), The McGraw-Hill Companies, Inc

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