Market Neutral Investing Long / Short Hedge Fund Strategies

by Nicholas, Joseph G.

• ISBN13: 9781576600375
• ISBN10: 1576600378
• Edition: 1st
• Format: Hardcover
• Copyright: 2000-09-01
• Publisher: Bloomberg Press

Summary

This is a book that looks at market-neutral strategies head on, assessing those that have worked and some notable ones that have failed - and explaining why. Clear, insightful, and illustrated with numerous charts and graphs, Market-Neutral Investing is an essential resource for professional investors.

Author Biography

Joseph G. Nicholas, JD is founder and chairman of HFR Group, LLC, which includes HFR Asset Management, LLC, a fund-of-funds management company and Hedge Fund Research, Inc., a leading supplier of hedge fund data. Author of Investing in Hedge Funds and Hedge Fund of Funds Investing, he is a frequent lecturer and media expert on topics relating to alternative investments.

Table of Contents

Acknowledgments	xvii
Foreword	xix
Introduction	1	(4)
Investing in Relationships	5	(14)
What Is Market Neutral?	5	(5)
Basic Concepts	10	(2)
Relationship Investing	12	(1)
Understanding Market-Neutral Approaches	13	(6)
Developments in the Hedge Fund Industry	19	(8)
Hedge Fund Industry Assets	20	(2)
Hedge Fund Investors	22	(2)
Hedge Fund Strategies	24	(3)
Making an Investment in Market-Neutral Strategies	27	(30)
Linear Analysis of Returns	28	(7)
Reducing Exposure to Risk	35	(5)
Market-Neutral and Hedged Strategies	40	(12)
Convertible Arbitrage	40	(2)
Fixed-Income Arbitrage	42	(1)
Mortgage-Backed Securities Arbitrage	43	(2)
Merger Arbitrage	45	(1)
Equity Hedge	46	(2)
Equity Market-Neutral and Statistical Arbitrage	48	(3)
Relative Value Arbitrage	51	(1)
Achieving Superior Risk-Adjusted Returns	52	(1)
Assessing the Risks	52	(2)
Transparency	54	(1)
Focusing on the Underlying Strategies	55	(2)
Convertible Arbitrage	57	(32)
Convertible Bond Valuation	58	(8)
Statistical Advantage	58	(1)
Convertible Valuation Components	59	(7)
Convertible Arbitrage Approaches	66	(7)
Quantitative Screens	66	(1)
Kinds of Hedges	66	(1)
Setting Up a Market-Neutral Hedge	67	(4)
Setting up a Bullish Hedge	71	(1)
Setting up a Bearish Hedge	72	(1)
Risks and Risk Control	73	(6)
Fundamental Analysis	73	(2)
Hedge Analysis	75	(1)
Portfolio Construction	76	(2)
Liquidity	78	(1)
Leverage	78	(1)
Source of Return	79	(1)
Convertible Bond Market History	80	(2)
Recent Growth and Developments in Convertible Arbitrage	82	(1)
Performance in Adverse Market Conditions	82	(2)
Historical Examples	84	(5)
Fixed-Income Arbitrage	89	(30)
Fixed-Income Arbitrage Approaches	91	(10)
Basis Trades	91	(2)
Asset Swaps	93	(1)
TED Spreads	93	(3)
Yield Curve Arbitrage	96	(4)
Relative Value Trades	100	(1)
Risks and Risk Control	101	(6)
Risks	101	(4)
Measuring and Controlling Interest Rate Risk	105	(2)
Sources of Return	107	(3)
Financing	108	(1)
Repurchase Agreements	108	(1)
Technology	108	(1)
Liquidity	109	(1)
Events	109	(1)
Manager Skill and Hard Work	110	(1)
Growth and Recent Developments in Fixed-Income Arbitrage	110	(9)
Mortgage-Backed Securities Arbitrage	119	(26)
Mortgage-Backed Structures or Sectors (Types of MBS Instruments)	121	(11)
Mortgage-Backed Securities' Evolution	121	(3)
Pass-Throughs	124	(1)
Basic Collateralized Mortgage Obligations (CMOs)	125	(3)
CMO Tranches	128	(4)
Valuation Methods	132	(1)
Option-Adjusted Spreads	132	(1)
Information Systems	133	(1)
Risks and Risk Control	133	(4)
Duration	134	(1)
Effective and Partial Duration	135	(1)
Parallel and Rotational Shifts of the Yield Curve	136	(1)
Convexity	136	(1)
Prepayment Duration	136	(1)
Leverage	136	(1)
Pricing	137	(1)
Source of Return	137	(3)
Valuation Models	138	(1)
Leverage	138	(1)
Liquidity	139	(1)
Financing	139	(1)
Hedging Techniques	139	(1)
Recent Developments in MBS Arbitrage	140	(5)
Merger Arbitrage	145	(32)
Merger Arbitrage Approaches	148	(18)
Cash Mergers or Tender Offers	148	(1)
Stock Swap Mergers	148	(3)
Stock Swap Mergers with a Collar	151	(6)
Multiple Bidder Situations	157	(5)
Leveraged Buyouts and Hostile Takeovers	162	(4)
Risks	166	(3)
Event Risk	166	(2)
Deal Flow	168	(1)
Liquidity	168	(1)
Risk Control	169	(1)
Diversification	169	(1)
Leverage	169	(1)
Source of Return	169	(1)
Growth and Recent Developments in Merger Arbitrage	170	(6)
Deal Flow and Other Factors Affecting Volume	171	(2)
Stress Period: The Third Quarter of 1998	173	(3)
Returns	176	(1)
Equity Hedge	177	(26)
Investment Themes and Fundamental Analysis	178	(3)
Investment Themes	179	(1)
Fundamental Analysis	180	(1)
Equity Hedge Approaches	181	(11)
Quantitative vs. Qualitative Mix	181	(1)
Universe of Stocks	182	(1)
Style	182	(6)
Liquidity	188	(1)
Net Market Exposure	189	(1)
Research	190	(1)
Leverage	191	(1)
Risks and Risk Control	192	(4)
Stock-Picking Risk	192	(1)
Market Risk	193	(1)
Universe of Stocks	193	(1)
Diversification	194	(1)
Sell Disciplines	195	(1)
Leverage	195	(1)
Source of Return	196	(1)
Recent Growth and Developments in Equity Hedge Investing	197	(6)
Equity Market-Neutral and Statistical Arbitrage	203	(28)
Equity Market-Neutral Approaches	205	(12)
Initial Screen: Universe of Investable Stocks	205	(3)
Stock Selection	208	(5)
Mean Reversion-Based Approaches	213	(4)
Risks and Risk Control	217	(5)
Portfolio Construction and Optimization	217	(4)
Manager Styles---Putting It All Together	221	(1)
Source of Return	222	(1)
Recent Growth and Developments in Equity Market-Neutral Investing	223	(8)
Relative Value Arbitrage	231	(16)
Relative Value Arbitrage Approaches	232	(9)
Convertible Arbitrage	233	(1)
Merger Arbitrage	234	(2)
Equity Statistical Arbitrage	236	(1)
Pairs Trading	237	(1)
Fixed-Income Arbitrage	237	(2)
Options and Warrants Trading	239	(1)
Capital Structure Arbitrage	240	(1)
Regulation D (Structured Discount Convertible) Arbitrage	241	(1)
Risks and Risk Control	241	(2)
Strategy Mix	242	(1)
Strategy Weightings	242	(1)
Source of Return	243	(1)
Growth and Recent Developments in Relative Value Arbitrage	243	(4)
Afterword	247	(2)
Glossary	249	(6)
Index	255