(Trading)Hf Technical And Quantitative Techniques Of Hedge Funds Managers(Adam Sorab,2002,Siat)

Technical and Quantitative Techniques of Hedge Funds Managers
Adam Sorab Chairman - STA SIAT Conference - Perugia April 13th 2002

Agenda
? ? ? ? ? ? What are hedge funds Different types of hedge funds Characteristics of good hedge funds Portfolio management approaches Risk management approaches Trading strategies by style

What are hedge funds?
? Skill based strategies not dependant on market direction ? Proven managers ? Sophisticated investment approaches ? Boutique investment teams ? Focussed investment resources ? Absolute return objective funds ? Able to employ all the tools of modern finance ? Required to invest alongside their clients

A wide range of styles and strategies
Global Macro
Discretionary strategy
Event Driven
Merger arbitrage strategy Bankruptcy distressed strategy Multi-event strategy
Relative Value
Convertible arbitrage strategy Fixed-income strategy
Equity Hedge
Long-short strategy
Short Selling
Systematic strategy
Opportunistic strategy Global/ international strategy
Rotational strategy
Aggressive strategy

Global Macro
? Directional investing approach to capitalise on macro-economic trends across all markets and sectors

Event Driven
?
Opportunistic strategies that exploit valuation imbalances between securities of companies involved in significant corporate events - mergers, spin-offs, bankruptcy, index changes etc.

Relative Value
? Quantitative investment approach that exploits temporary imbalances and mis-valuations in related market instruments - convertible bond arbitrage and derivative arbitrage

Equity Hedge
? Strategies based on purchasing undervalued equity securities and selling overvalued securities short - long/short equity

Short Sellers
? Hedge funds that sell borrowed securities considered overvalued in anticipation of repurchasing them for a profit at a lower price

Strong Absolute Returns
Hedge Funds vs German Traditional Assets
700 600 500 400 300 200 100 0 90 91 92 93 94 95 96 97 98 99 00 01
German Govt. Bonds DAX Hedge Funds

Superior Risk vs Reward
25 Annual Return (%) 20
HFRI Index Equity Hedge Global Macro Event Driven Relative Value German Govt Bonds
15 10 5 0
DAX Index
MSCI World Index
Risk-free rate
JPM Global Govt Bond
0
5
10
15
20
25
Volatility of Returns (%)
Source: Datastream Hedge Fund Research, Deutsche Bank

Low correlation
1.0
Correlation of returns of a fund of funds, equally weighted across investment styles
0.8
0.6
0.4
0.2
0.0
-0.2
S&P 500
World equities
UK equities
UK govt bond
German govt bonds
Global govt bonds
Total return in USD Source: Datastream Hedge Fund Research, Deutsche Bank

The attraction of hedge funds

Risk#1 in hedge funds - Regret

Risk#2 in hedge funds - Kurtosis

Good vs Bad Hedge Funds
f
Good = thin tailed, +ve skewed Universe = fat tailed, symmetric
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+