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Fixed Income Long Short - Hedge Fund Strategies


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

Published in: Business, Economy & Finance
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Fixed Income Long Short - Hedge Fund Strategies

  1. 1. Hedge Fund Strategies Fixed income long short
  2. 2. Fixed income long short Index: 1. Definition 2. Strategies 2.1. Mortgage backed security arbitrage 2.2. Corporate bond arbitrage 2.3. Convertible bond arbitrage
  3. 3. 1. Definition Fixed income long short: Evolves the investment strategies on private and public debt instruments with: Fixed maturities and rates (Donald & Lacey, 2003) Their derivatives
  4. 4. 1. Definition According Howell (2003): There are many forms of fixed interest arbitrage opportunities - mortgage backed security arbitrage; government bond yield curve arbitrage; corporate bond arbitrage and convertible bond arbitrage.
  5. 5. 2.1. Mortgage backed security arbitrage MBS: developed by financial institutions, are pools of mortgage-backed debt. A common trade is to short a government bond and take a long position on a mortgage-backed security of similar maturity. While hedging the risk from interest rate surprises, the trader will receive a payoff from the yield differential. (Connor & Lasarte,n.d.)
  6. 6. 2.2. Corporate bond arbitrage The capital structure of a company can be decomposed into equity, senior debt and subordinated debt; The hedge fund manager want to take advantage of perceived misprising in the capital structure (Howell, 2003)
  7. 7. 2.3. Convertible bond arbitrage Profits from differences between convertible bonds a company issues and the prices of the common stock. (Donald & Lacey, 2003)
  8. 8. 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; Howell, 2003, ‘Fixed Income Hedge Fund Strategies’, in Eureka Hedge, viewed 3 August 2013, from me.asp