| HEDGE FUNDS |
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| Alejandro Ochoa J |
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| Event-Driven Hedge Fund The manager invests, both long and short, in the securities of companies which are expected to change in price over a short period of time due to an unusual event. In many cases, these investments are distressed securities, i.e. the debt/and or equity of companies that are in bankruptcy reorganization or that are emerging from bankruptcy or that appear likely to declare bankruptcy in the near future. In addition to, or instead of, investing in distressed situations, the manager may invest in companies subject to other types of special situations, including corporate restructurings (e.g. divestitures, mergers, acquisitions), stock buybacks, bond upgrades, and earnings surprises. |
| Market-neutral arbitrage The manager seeks to exploit specific inefficiencies in the market by trading a carefully hedged portfolio of offsetting long and short positions. By pairing individual long positions with related short positions, market-level risk is greatly reduced, resulting in a portfolio that has a low beta and a low correlation to the market as well. The manager may focus on one or several kinds of arbitrage, such convertible arbitrage, risk (merger) arbitrage and fixed income arbitrage. The paired long and short securities are related in different ways in each of these different kinds of arbitrage but, in each case, the manager attempts to take advantage of pricing discrepancies and/or projected price volatility involving the paired long and short security. Market-neutral Arbitrage managers may employ a number of different sub-strategies, including: Convertible (Bond) Arbitrage, Fixed Income Arbitrage, Merger (or Risk) Arbitrage, Statistical Arbitrage, and others. |
| Aggressive Growth A primarily equity-based strategy whereby the manager invests in companies experiencing or expected to experience strong growth in earnings per share. The manager may consider a company's business fundamentals when investing and/or may invest in stocks on the basis of technical factors, such as stock price momentum. Companies in which the manager invests tend to be micro, small, or mid-capitalization in size rather than mature and large-capitalization companies. These companies are often listed on (but are not limited to) the NASDAQ. Managers employing this strategy generally utilize short selling to some degree, although a substantial long bias is common. |
| Market-neutral Securities Hedging The manager invests similar amounts of capital in securities both long and short, maintaining a portfolio with low net market exposure. Long positions are taken in securities expected to rise in value while short positions are taken in securities expected to fall in value. These securities may be identified on various bases, such as the underlying company's fundamental value, its rate of growth, or the security's pattern of price movement. Due to the portfolio's low net market exposure, performance is insulated from market volatility. |
| Opportunistic Rather than consistently selecting securities according to the same strategy, the manager's investment approach changes over time to better take advantage of current market conditions and investment opportunities. Characteristics of the portfolio, such as asset classes and market capitalization are likely to vary significantly from time to time. The manager may also employ a combination of different approaches at a given time. |
| Value A primarily equity-focused strategy whereby the manager evaluates the price of a security relative to the underlying business' intrinsic value. The manager takes long positions in stocks that he believes are undervalued, i.e. the stock price is low given company fundamentals such as high earnings per share, good cash flow, strong management, etc. Possible reasons that a stock may sell at a perceived discount could be that the company is out of favor with investors or that its future prospects are not correctly judged by Wall Street analysts. The manager takes short positions in stocks he believes are overvalued, i.e. the stock price is too high given the level of the company's fundamentals. As the market comes to better understand the true value of these companies, the manager anticipates, the prices of undervalued stocks in his portfolio will rise while the prices of an overvalued stocks will fall. The manager often selects stocks for which he can identify a potential upcoming event that will result in the stock price changing to more accurately reflect the company's intrinsic worth. |
| Macro The manager constructs his portfolio based on a top-down view of global economic trends, considering factors such as interest rates, economic policies, inflation, etc. Rather than considering how individual corporate securities may fare, the manager seeks to profit from changes in the value of entire asset classes. For example, the manager may hold long positions in the U.S. dollar and Japanese equity indices while shorting the euro and U.S. treasury bills. |
| Market Timing The manager attempts to predict the short-term movements of various markets (or market segments) and, based on those predictions, moves capital from one asset class to another in order to capture market gains and avoid market losses. While a variety of asset classes may be used, the most typical ones are mutual funds and money market funds. Market timing managers focusing on these asset classes are sometimes referred to as mutual fund switchers. |
| Futures The manager invests primarily in futures, which are financial contracts for the buying and selling of an index or commodity at some future date. Futures contracts to buy act as long positions while futures contracts to sell may hedge a portfolio. Trading futures can entail particularly high levels of leverage and could therefore pose greater risk than other investment strategies. |
| Emerging Markets The manager invests in securities issued by businesses and/or governments of countries with less developed economies (as measured by per capita Gross National Product) that have potential for significant future growth. Examples include Brazil, China, India, and Russia. Most emerging market countries are located in Latin America, Eastern Europe, Asia, or the Middle East. This strategy is defined purely by geography; the manager may invest in any asset class (e.g., equities, bonds, currencies) and may construct his portfolio on any basis (e.g. value, growth, arbitrage). |
| Income The manager invests primarily in yield-producing securities, such as bonds, with a focus on current income. Other strategies (e.g. distressed securities, market neutral, arbitrage, macro) may heavily involve fixed-income securities trading as well. This category does not include those managers whose portfolios are best described by one of those other strategies. |
| Multi-strategy The manager typically uses two or three specific, pre-determined investment strategies, e.g., Value, Aggressive Growth, and Special Situations. Although the relative weighting of the chosen strategies may vary over time, each strategy plays a significant role in portfolio construction. Managers may choose to employ a several strategies approach in order to better diversify their portfolio and/or to more fully use their range of portfolio management skills and philosophies. |
| Short selling The manager maintains a consistent net short exposure in his portfolio, meaning that significantly more capital supports short positions than is invested in long positions (if any is invested in long positions at all). Unlike long positions, which one expects to rise in value, short positions are taken in those securities the manager anticipates will decrease in value. In order to short sell, the manager borrows securities from a prime broker and immediately sells them on the market. The manager later repurchases these securities, ideally at a lower price than he sold them for, and returns them to the broker. In this way, the manager is able to profit from a fall in a security's value. Short selling managers typically target overvalued stocks, characterized by prices they believe are too high given the fundamentals of the underlying companies. |
| Fund of Funds The manager invests in other hedge funds (or managed accounts programs) rather than directly investing in securities such as stocks, bonds, etc. These underlying hedge funds may follow a variety of investment strategies or may all employ similar approaches. Because investor capital is diversified among a number of different hedge fund managers, funds of funds generally exhibit lower risk than do single-manager hedge funds. Funds of funds are also referred to as multi-manager funds. |
| Long/Short Equity Group Aggressive Growth Market-neutral Securities Hedging Opportunistic Value |
| Directional Trading Group Macro Market Timing Futures |
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| STRATEGY DEFINITIONS |
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| Market Neutral Group Event-Driven Market-neutral arbitrage |
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| Specialty Strategies Group Emerging Markets Income Multi strategy Short Selling |
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| Sources: www.hedgefund.com, www.answers.com/topic/hedge-fund |
