HEDGE FUNDS

YASH VARDHAN VERMA

What is a hedge fund?
• A hedge fund is an alternative investment vehicle which is different
from traditional investment funds in a number of ways.

• The legislative requirements are less restrictive for hedge funds.

This allows hedge funds to use a number of financial instruments
and investment tactics which are off limits to traditional investment
funds.

• For instance, hedge funds are allowed to use high leverage and can
go short in a number of markets, e.g. stock, securities, currency and
commodities markets.
What is "hedging"?
• Hedging is another word for risk management. The
fund managers apply hedging techniques in order to
mitigate a certain type of risk.
Types of risk hedged against include:
• market risk
• inflation risk
• long exposure risk
• interest rates
• large sector weightings (region, sector, company,
currency).
Hedging techniques include raising cash and selling
short as well as buying/selling options, futures or
commodity.
 HEDGE FUND STRATEGIES
• Merger Arbitrage
• Fixed Income Arbitrage
• Global Macro
• Convertible Arbitrage
• Equity Market Neutral
 MERGER ARBITRAGE
• an event-driven strategy in which the
arbitrageur takes a position of both
companies involved in a merger or acquisition,
typically long the stock of the company being
acquired and short the stock of the acquirer.
 FIXED INCOME ARBITRAGE
• a strategy designed to capture pricing
disparities within fixed income markets and
related derivatives. Examples of where such
disparities may exist are yield curve
anomalies, volatility differences and the
futures market versus the underlying bonds.
 GLOBAL MACRO
• a broad strategy that invests (long or short)
across asset classes in anticipation of market
movements or trends in interest rates,
currencies, commodity prices and equity
markets.
 CONVERTIBLE ARBITRAGE
• - a strategy designed to take advantage of
pricing inefficiencies of the embedded option
in a convertible bond. Typically, the
arbitrageur would be long the convertible
position and short the underlying stock.
 EQUITY MARKET NEUTRAL
• - a strategy designed to exploit equity price
inefficiencies through balanced long and short
positions that insulate the portfolio from
overall market risk. Long/Short - the most
common hedge fund strategy in which a
manager takes long and short equity
positions. Depending on the mix of long and
short positions the portfolio may have a long
bias or short bias.