4.7
You run a multistrategy hedge fund. An employee proposes trading
pairs of stocks. Is that a good strategy to add to a complicated mix of
hedge fund strategies?
4.8
Would an endowment or foundation be interested in a hedge fund
that relies on a dividend capture strategy?
4.9
What are the major risks taken by a convertible bond arbitrage hedge
fund?
4.10 Many investors worry that the fixed income arbitrage strategies in-
volve a pattern of many small profits over and over followed by a
large and unpredictable loss. Explain why this pattern may or may
not be an attractive pattern of return for a hedge fund investor.
4.11 Problems with mortgage trades have occurred when interest rates
have been rapidly declining. If you believe interest rates will rise,
should you invest in mortgage strategies?
4.12 Why might it be desirable to overweight a fund of funds into the pop-
ular hedge fund strategies?
NOTES
1. By convention, securities loans use an actual/360 day calendar, meaning that in-
terest accrues for 184 actual days from March 15 to September 15 and the 5
percent annual rate is allocated over a 360-day year:
$900,000
x 5% x 184/360 = $23,000
2. As in note 1:
$1,000,000
x 3% x 184/360 = $15,333
3. Michelle Pacelle, "Hedge Funds Face Tougher Times--As Ellington's Vranos
Discovers, Less Leverage and More Scrutiny Pose New Challenges for Man-
agers," Wall Street Journal, February 12, 1999.
4. Harry Markowitz, "Portfolio Selection," Journal of Finance, Volume 7, Issue 1,
March 1952, pages 77­91.
Hedge Fund Investment Techniques
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