Performance of Hedge Fund Styles (Hypothetical)

2.13 What is the expected return on the portfolio if you reallocate 10 per-
cent of the stock portfolio into a convertible arbitrage hedge fund?
What is the standard deviation of the portfolio comprising 90 percent
stocks and 10 percent convertible bond hedge fund?
2.14 What is the expected return on the portfolio if you reallocate 10 per-
cent of the stock portfolio into a global macro hedge fund? What is
the standard deviation of the portfolio comprising 90 percent stocks
and 10 percent global macro hedge fund?
2.15 What is the expected return on the portfolio if you reallocate 10 per-
cent of the stock portfolio into a long/short equity hedge fund? What
is the standard deviation of the portfolio comprising 90 percent
stocks and 10 percent long/short equity hedge fund?
2.16 Based on your results in questions 2.13 to 2.15, which hedge fund
should you invest in?
2.17 Suppose you could invest in a hedge fund that would provide an ex-
pected return of 8 percent and have volatility of 20 percent with a
correlation of 50 percent to stock returns. Should you move some of
the stock money into this fund?
2.18 An individual has half of the family net worth tied up in a closely
held public business and the balance in a broadly diversified portfolio
of common stocks. What special concerns would this investor have in
selecting a hedge fund style?
2.19 What advantages does an investor get from investing directly in a
portfolio of individual hedge funds rather than investing in a fund
of funds?
2.20 Why do so many different hedge fund styles exist?
2.21 Why would an investor put money in a hedge fund that followed a
short-only strategy?
2.22 How is it possible to reconcile the low measured risk (at least
in terms of the standard deviation of return) of the fixed income
arbitrage strategy and the investor perception that this is a risky
strategy?
32
HEDGE FUND COURSE
ccc_mccrary_ch02_19-34.qxd 10/6/04 1:41 PM Page 32