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

1. Hedge Fund Strategies
Equity long short

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. 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. 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. 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. 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. 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. 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. 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. 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