On February 19th, 2020, the S&P 500 hit an all-time high of 3,386.15. Thirty-three days later, on March 23, the S&P 500 closed at 2,232.40, a 34% collapse. Between February and April, 5.3 trillion dollars of the S&P 500’s market cap was wiped out from Covid-19 Pandemic. Fast forward to the end of May, where … Read more
Global stocks recover from the risk off mood that took hold in the last week of July. S & P 500 stays in line, inching higher day over day. Initial jobless claims drop to the lowest levels since the pandemic, but still remain above 1 million. Dollar continues to weaken despite lower M2 levels continuing … Read more
An approach to determining the desired allocation to the alternative asset classes is to make the initial asset allocation decision using only the broad, liquid asset classes and do a second iteration of the asset allocation exercise incorporating alternative assets. There are three primary approaches that investors use to approach this second iteration. Monte Carlo … Read more
Traditional approaches to defining the investment opportunity set include classifying asset groups by liquidity or by how they perform over economic cycles. Liquidity-Based Investment Opportunity Set shows how asset classes might be considered based on liquidity characteristics. Liquidity-Based Investment Opportunity Set Opportunity Set shows an example of an investment opportunity set that uses this approach. Economic Environment-Based Investment Opportunity … Read more
Below is a framework for how the common alternative strategies are generally perceived to affect the risk/return profile of a normal 60/40 portfolio of public stocks and bonds. In the context of asset allocation, investors may categorize an asset class based on the role it is expected to play in the overall portfolio. The roles … Read more
When a 20% allocation to hedge funds is added to a traditional 60% stock/40% bond investment portfolio, the resulting allocation is 48% stock, 32% bond, and 20% hedge fund. When we add a 20% allocation to most hedge fund strategies to a traditional portfolio, the general result is the following: Total portfolio standard deviation decreases. … Read more
Following a practice-based risk factor perspective, a conditional linear factor model can be used to uncover and analyze hedge fund strategy risk exposures. A simple conditional linear factor model applied to a hedge fund strategy’s returns can be represented as: (Return on HFi)t = αi + βi,1(Factor 1)t + βi,2(Factor 2)t + … + βi,K(Factor K)t + Dtβi,1(Factor 1)t + Dtβi,2(Factor 2)t + … … Read more
Three main approaches are used to combine individual hedge fund strategies into a portfolio: creating one’s own mix of managers by investing directly into individual hedge funds running different strategies fund-of-funds, which involves investing in a single fund-of-funds manager who then allocates across a set of individual hedge fund managers running different strategies multi-strategy funds, which … Read more
Portfolio managers for specialist hedge fund strategies use their knowledge of a particular market to pursue niche investment opportunities. Volatility Trading Once an esoteric pursuit, volatility trading has evolved over recent years to become a recognized investable asset. Volatility trading hedge fund managers will trade volatility-related assets globally, across countries and across asset classes, in order to exploit perceived … Read more
Opportunistic hedge fund strategies are a broad class of investing approaches that attempt to extract profits using a wide range of techniques in a broad range of securities markets. Rather than being focused on individual securities, these strategies take a top-down approach to make macro investments on a global basis across regions, sectors, and asset classes. … Read more
Relative value strategies attempt to exploit valuation differences between securities. The most common securities used in relative value strategies are hybrid convertible debt, as well as fixed-income securities. Fixed Income Arbitrage The idea behind fixed-income arbitrage strategies is to take advantage of temporary mispricing of fixed-income instruments, by going long comparatively undervalued securities, and going short comparatively overvalued … Read more