Hedge Fund Introduction

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  • Topic: Hedge fund, Arbitrage, Long-Term Capital Management
  • Pages : 71 (12758 words )
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  • Published : October 14, 2010
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Hedge Funds Class
London February 2007

February 9, 2007

SECTION 1

Class Agenda

Agenda
♦ 9:00 - 10:30 ♦ 10:30 - 10:45 ♦ 10:45 - 12:15 ♦ 12:15 - 1:30 ♦ 1:30 - 2:15 ♦ 2:15 – 3:00 ♦ 3:00 - 3:15 ♦ 3:15 - 4:00 ♦ 4:00 - 4:45 ♦ 4:45 - 5:00 Hedge Fund Basics Coffee Break Basics Continued Lunch Continued Hedge Fund Services Coffee Break Fund of Funds Stuart Trueman Joe Troccolo Tamera Hodges Joe Troccolo Joe Troccolo

Hedge Funds & Corp Finance Laurent Charbonnier Wrap-up / Optional Exam Joe Troccolo

2

Hedge Funds
Joe Troccolo, Managing Director Financial Markets Education
London, February 2007

Table of contents
SECTION 1 SECTION 2 SECTION 3 SECTION 4 SECTION 5 SECTION 6 SECTION 7 SECTION 8

Why Hedge Funds? Hedge Fund Strategies Equity Long/Short Equity Market Neutral Risk Arbitrage Global Macro LTCM: Case Study Appendix: Pick Your Fund

3 28 31 50 60 74 89 100

1

Financial Markets Education
Financial Markets Education provides instruction on all aspects of banking and finance for UBS employees and for our top clients. Europe Joe Troccolo
London +44 20 7568 0735 joe.troccolo@ubs.com

United States Joe Bonin
Stamford + 1 203 719 6507 joe.bonin@ubs.com

APAC Onn Chan
Singapore +65 6836 5708 onn.chan@ubs.com

Walter Braegger
London +44 20 7568 8938 walter.braegger@ubs.com

Kai-Hing Lum
Tokyo +81 352 08 6494 kai-hing.lum@ubs.com

Spencer Morris
London +44 20 7568 8939 spencer.morris@ubs.com

2

SECTION 1

Why Hedge Funds?

Comparison to traditional strategies
Traditional Fund
Return Characteristics

Hedge Fund
♦ Absolute, positive returns ♦ ♦ ♦ ♦ ♦
(exploit investment opportunity) Return volatility dictated by manager’s approach to risk Liquidity risk Mark to market risk Change of strategy risk Human risk

♦ Relative to benchmark ♦
(capture asset class premium) Return volatility tracks market volatility

Risk Attributes

♦ Market risk ♦ Credit risk

Transparency Regulation Performance Driver Fee Structure

♦ High ♦ High ♦ Market performance ♦ Asset allocation decision ♦ Management Fee < 1%

♦ Low ♦ Low ♦ Sustainable investment skills ♦ Sound risk management ♦ Management Fee (1-2%) ♦ Incentive Fee (10-25%)

4

Investing
♦ Asset Allocation is the most important decision ♦ Avoiding “negative compounding” is crucial ♦ Hedge Funds offer the possibility of – Returns uncorrelated to other asset classes – Low probability of negative returns – Neither is guaranteed!

5

Negative Compounding
♦ Nearly impossible to over-emphasise the importance of avoiding losses ♦ Investment 1: +6.00% per annum every year for 20 years – £100 invested for 20 years =

♦ Investment 2: +18% per annum for 10 years, -6.00% per annum for 10 years – £100 pounds invested for 20 years =

♦ Put another way – if you have in a 20 year period, 10 years of 6% losses, how much profit do you need in the other 10 to make it up so that you average +6% for the full 20 years? – 6.00% losses for 10 years plus ____% gains for 10 years = +6.00% gains for 20 years

6

A Picture Worth 1000 Words!
Hedge Fund Index vs SP Total Return
60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 -10.00% -20.00% -30.00% -40.00% -50.00% Nov 2000 - Sep 2005 57 1 3 5 7 9

SPTR CS/TRE

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Average returns and variability: Jan 1994 to May 2003
30

Annualised Average Return (%)

25

20 CSFB/Tremont Index 15 Equity Market 10 Neutral Distressed Securities Convertible Arbitrage Merger Arbitrage 5 1 Year T-Bill FIA Event-Driven Managed Futures Global Macro

Long/Short Equity S&P 500 Emerging Markets

0 0 2 4 6 8 10 12 14 16 18 20

Risk Annualised Standard Deviation (%)

Source: CSFB/Tremont Advisers
8

So what are they?
♦ Hedge funds are usually organised as a private partnership ♦ The general (managing) partner has a substantial personal stake in the fund ♦ In the US these funds have chosen to exempt themselves...
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