Each of these styles is tracked by one or more data provider. While these
categorizes may be defined somewhat inconsistently, they nevertheless
serve as a helpful resource to the fund investor.
The performance of the many styles of hedge funds derives from
the inherent characteristics of the assets in the hedge fund portfolios.
The performance is also affected by the way the instruments are com-
bined. The resulting returns can be predicted in an important way. It is
difficult to forecast the performance of a particular fund or sector next
month. It is possible, though, to predict which hedge funds will do well
(or poorly) if certain things happen (rising interest rates, changes in
corporate borrowing spreads, rising volatility, etc.). Because of this pre-
dictability, investors can combine these hedge fund assets with tradi-
tional portfolios to improve the risk and return characteristics of their
portfolios.
QUESTIONS AND PROBLEMS
2.1
Why do so many organizations provide hedge fund indexes?
2.2
What is a long/short equity hedge fund?
2.3
What is an equity arbitrage hedge fund?
2.4
What is an equity pairs strategy?
2.5
What is an equity market neutral hedge fund?
2.6
What are some of the types of strategies an event driven hedge fund
would pursue?
2.7
Describe the nature of a convertible bond investment.
2.8
What kinds of trades would you expect to find in a fixed income arbi-
trage hedge fund?
2.9
What kinds of securities would you expect to find in an emerging
markets hedge fund?
2.10 What is the biggest risk to an investment in a distressed securities
hedge fund?
2.11 What kind of fund would call itself a global macro hedge fund?
2.12 What is a fund of funds?
You own a portfolio of common stocks that more or less tracks the stock
index in the preceding table. The statistics are historical but you believe
they are reasonable forecasts of future returns. Rely on the following table
to answer questions 2.13 to 2.17.
Types of Hedge Funds
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