Hedge fund strategy
Hedge fund strategies are a series of - sometimes complex - investment strategies that are pursued by hedge funds . They make it possible to participate in both rising and falling markets.
These strategies may be used by other, traditional institutional investors such as B. Investment and pension funds are not accepted due to regulatory restrictions.
Overview
Hedge fund strategies are usually divided into the following categories (increasing risk) depending on the market risk:
| Relative value | Event driven | Directional |
|---|---|---|
| Convertible arbitrage | Risk arbitrage | Global Macro |
| Fixed Income Arbitrage | Distressed securities | Emerging markets |
| Equity Market Neutral |
With the "Relative Value" strategy, the market risk is comparatively low, it increases with "Event Driven" and is highest with "Directional":
- Relative valuation ( English relative value ): speculating on the development of a price difference:
- Fixed Income Arbitrage (the arbitrage in bonds )
- Equity-neutral ( stock market ),
- Convertible -Arbitrage ( English convertible arbitrage )
- Statistical arbitrage.
- Takeover -Arbitrage ( English merger arbitrage )
- Bonds / shares of companies in a corporate crisis ( english distressed securities )
- Activism.
- Directionally ( English directional ): speculating in a certain direction:
- Global Macro : global investments that are mutually balanced
- Long and short ,
- Short sale ,
- Individual investments in emerging markets ( English emerging markets stock picking ).
The following still exist (without risk classification):
- Managed Futures ( CTA )
- Multi-strategy : a combination of different strategies.
Directional strategies
Long / short equity
With this strategy, shares of different companies are bought and sold at the same time. It is speculated that some companies will do better in the future and others will do worse at the same time. The positions entered here can also be financed (ie leveraged ) by outside capital .
Short sale
In contrast to traditional investment funds, which have to follow a so-called long-only approach (ie can buy different stocks), hedge funds can also only sell stocks short in order to benefit from falling prices.
Emerging Markets Stock Picking
The emerging markets (English emerging markets ) are usually inefficient than the highly capitalized markets of industrialized countries. Since short sales and derivatives are only available to a limited extent in such markets , this strategy tries to find undervalued stocks through stock picking .
This bet on rising prices without hedging against market risks represents a significant directional risk for the fund.
Relative value strategies
"Make money on spreads." Representatives of relative value or arbitrage strategies generate their profits by exploiting price differences between related securities ( spread ). For example, a manager buys undervalued stocks for a short time on a stock exchange in order to sell them at a higher price at another trading venue.
Depending on the investment focus, a distinction is made between four sub-categories:
Fixed Income Arbitrage Fund
... focus on price differences between different fixed income securities.
Convertible (bond) arbitrage strategies
... take advantage of price anomalies in convertible bonds relative to stocks. For example, the manager buys an undervalued convertible and sells the higher-valued stock that it can be exchanged for.
Capital Structure Arbitrage Strategies
... simultaneously take up different positions in equity and debt securities of a company in order to exploit relative mispricing between them.
Market or sector neutral strategies
Individual stocks are bought or sold and additionally hedged against market or sector risk (“hedge”). This is done by entering an opposing position in the associated market or sector index. The risk of a sudden collapse in the market or sector is thus - at least partially - eliminated.
Example of a market-neutral position : Buying Allianz shares and selling a DAX future at the same time. The hedge fund is speculating that the stock will perform better than the market as a whole.
Example of a sector-neutral position : Sale of VW shares and simultaneous purchase of EURO STOXX® TMI Automobiles & Parts . It is speculated that the share will perform worse than all other companies in the sector.
Statistical arbitrage
Statistical arbitrage in the context of hedge fund strategies does not describe arbitrage in the narrower sense, but a so-called quantitative trading strategy that speculates on the return of two or more values to their common historical mean.
Event-driven strategies
The Event Driven Manager focuses on companies that are facing an extraordinary situation. Experience has shown that dramatic events in a company have a greater impact on the share price than the general economic environment justifies.
Takeover arbitrage
Takeover arbitrage (also risk arbitrage or merger arbitrage ) tries to track down companies that are about to take over or plan to take over another.
Distressed companies
The English distressed securities strategy invests in companies that are in financial distress or distress. A liquidity premium can be collected here, as the other investors usually withdraw money from such companies on a large scale.
This can also result in an undervaluation of the company, ie the company is traded below its "true" value. The hedge fund buys parts of the company; if this later recovers, the shares can be sold for a profit. Since banks usually do not grant further loans to such troubled companies, a hedge fund is sometimes the last option to save the company from bankruptcy.
On the other hand, there have been cases where hedge funds bought companies in distress, sold the profitable shares, and closed the remainder.
Self-caused events
Self-caused events or so-called English special situations are events that the hedge fund itself causes. Usually this is done by forcing management to initiate decisions that increase the value of the company ( e.g. share buybacks , joint ventures , buyouts or spin-offs ) or only serve the short-term well-being of the shareholders (e.g. Increase in dividend ).
Global Macro Strategies
"Make money on trends." In global macro strategies (GMS) , the managers try to identify macroeconomic market developments at an early stage and exploit them profitably, e. B. when speculating for or against a currency (see short sale ). GMS do not have a uniform risk profile. You carry out economic analyzes and observe social and political developments in order to be able to predict rates / currency rates or the like. Your success depends on the correct interpretation and evaluation of economic factors such as interest rate developments or currency fluctuations .
One example is the Soros Fund Management , a hedge fund of George Soros with a global macro strategy , which in 1992 the overvaluation of the English pound watched and through strategic sales (together with other investors) from an estimated 10 billion GBP , the Central Bank as well as the supportive central banks of Switzerland , Germany and France forced to stop buying the British pound. As a result, the pound was devalued to its real level and thus left the currency agreement known as the ECU , which later became the European Monetary Union . The agreement was supposed to keep the pound at a fixed rate of fluctuation against the other European currencies, but the valuation was politically motivated and too high. The overvaluation was tactically necessary so that Great Britain could have entered the European Monetary System (EMS). Great Britain left the EMS after the intervention of Quantum Funds and thus did not participate in the changeover to the common currency, the euro , even later .
Representatives of the global macro strategy use numerous financial instruments such as futures and options in the areas of currencies , commodities , interest rates and stock indices , fixed-income products and other derivatives. Global macro strategies can be divided into Currencies (lc), emerging markets ( emerging markets ), market timing and commodities (raw materials).
convergence
Two opposing investment instruments are used in parallel in the expectation that the price development of two investment options will converge (converge). This convergence should be strategically exploited through suitable investment behavior.
example
A hedge fund expects the economic situation in Italy and Germany to converge. He wants to be relatively independent of the overall economic development. The hedge fund is therefore betting that the interest rate differential between Italy and Germany will gradually decrease. This means that the prices of Italian fixed income securities will increase compared to the prices of German fixed income securities. So the hedge fund buys futures Italian fixed-income securities and sold on the same date German fixed-income securities. The hedge fund always makes a profit when the German and Italian rates actually converge, even if both fall or both rise overall, it depends on the convergence.
This was the deal LTCM did as the euro approached . However, there was then the ruble crisis and further financial market turbulence, which made Germany appear more of a “safe haven” than Italy. So the courses diverged. The US central bank then organized a special rescue operation for LTCM.
Multi strategy
The multi-strategy approach combines several of these hedge fund strategies. Often this approach is also assigned to the relative value strategies. Multi strategies can be implemented in a single hedge fund, but also in a hedge fund. Either a manager practices several trading styles at once, or the capital is placed in the hands of various internal or external market and strategy experts who look after individual parts of the fund's assets.
In the more recent literature (see: Weber, Thomas: Das 101 der Hedge-Fonds, Campus Verlag 1999), managed futures are also included in the class of hedge funds.
In general, the classification of the individual strategies in the literature is quite different.
Strategy examples
- A fund manager bets that a share will fall on the stock exchange. He does not own this stock himself, so the fund manager borrows ( shorts ) the stock. He sells the borrowed stock for $ 10. After that, the share price drops from $ 10 to $ 9 as speculated, and the fund manager can buy back the borrowed shares for $ 9. He made a profit of $ 1, but the stock could have gone up just as well.
- A fund manager enters into a forward deal . He bets on falling raw material prices and offers this raw material for a fixed amount on a fixed date. If the raw material prices are lower than the purchase price on the agreed reference date, the fund manager has made a profit; if the prices are higher, not.
These very simplified examples do not include the complicated mechanisms of leverage through leverage through borrowing and other mechanisms.
Hedge fund
A fund of hedge funds made up of several Sub together, the one turn strategies single hedge funds pursue.
No investments are made at the level of the fund of funds , the investment business only runs at the level of the subfunds . A distinction is only made between investments in various sub-funds. It is one of the "alternative investments". Basically, it is one of the open funds, but buying and selling are only possible for a limited time - usually once a month.
Since January 2004 it has been allowed to be sold in Germany and Austria .
- advantages
Its advantage is that many strategies are bundled here in order to achieve a balanced risk-reward structure .
- disadvantage
Its disadvantage is that each subfund and the fund of funds charge fees, which reduces the return. In addition, the Subfunds may have contradicting strategies.
To put it very simply, it may be that Subfund A bets against the DAX (builds up short positions), while Subfund B does the opposite. As a result, the investor inevitably plays a zero-sum game, minus the expenses.
literature
- Holler, Julian (2012): Hedge Funds and Financial Markets , Gabler Verlag, Springer Fachmedien. ISBN 978-3-8349-3277-8 .
- Saber, Nasser (1999): Speculative Capital Volume 1 - the invisible hand of global finance. Financial Times, Prentice Hall. ISBN 0-273-64155-7
- Alexander H. Engelhardt, white paper on the event-driven investment strategy Activist Investing (PDF file; 128 kB)
- Alexander H. Engelhardt, Activist Investing from a corporate perspective, MAR 2008, p. 194ff (PDF file; 441 kB)