...Gregory Connor and Mason Woo An Introduction to Hedge Funds Introductory Guide 1 Introduction International Asset Management (‘IAM’) is the proud sponsor of the IAM Hedge Fund Research Programme of the Financial Markets Group. Within this programme the LSE team undertakes independent research into aspects of the hedge fund industry. It is hoped that the results of this research will give greater understanding about this growing area of financial innovation. This research paper gives a broad introduction to the hedge fund industry, the historical background to the evolution of hedge funds, the fund of funds industry and provides an explanation of some of the terminology used within this area. As an overview of the industry the document does not attempt to address the use of hedge funds within the broader context of portfolio management such as organisational risk or other areas of concern for the investor. This is a nontechnical paper and as such is intended for students or practitioners seeking a general introduction and reference tool. It is not a survey of the research literature and citations are kept to a minimum. If you wish to keep updated on the IAM Hedge Fund Research Programme please let us know. If you have any questions please contact IAM at our London office or visit our website: 34 Sackville Street London W1S 3EF Tel. +44 (0)20 7734 8488 www.iam.uk.com For information about the research activities of the Financial Markets Group see the following page...
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...Portfolio Strategy Assignment Demetrie M. Howard University of Phoenix Introduction The organization I have chosen to plan a portfolio strategy for is O’Connor and Associates. This organization is my current employer and it will be a challenge to create one for them. The organization is a property tax firm, it assist clients with reducing the appraised value of their property, which in turn reduces the amount of property taxes due. The organization is diversifying; it is going into third party collections, judgment recovery, and mortgage loans. This firm has made substantial errors in the past therefore to understand the cause and effect of those errors we will attempt to model their market and business behaviour. This model is an effort to estimate the expected results of alternative strategies and processes. Consumer expectations and other variables as well as technology, the internet, telecommunications and globalization have accelerated the pace of change, and shortened product lifecycles has contributed to this strategic plan. Technology has augmented the capability to amass information and respond to change immediately and analytically. It is also important for corporations to achieve and maintain their competitive advantages. Cash Infusion The cash infusion allocated to enhance the company and to manage is $40 million dollars. Following is the description of portfolio strategy and a portfolio of assets in relation to the investment of $40 million...
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...T H E J O U R N A L THEORY & PRACTICE FOR FUND MANAGERS O F FALL 2013 Volume 22 Number 3 RISKBASED PORTFOLIOS special section The Voices of Influence | iijournals.com Pursuing the Low Volatility Equity Anomaly: Strategic Allocation or Active Decision? ERIK KNUTZEN ERIK K NUTZEN is the chief investment officer at NEPC LLC in Cambridge, MA. eknutzen@nepc.com FALL 2013 JOI-KNUTZEN.indd 75 I n the past several years, asset managers have built investment strategies based on historical evidence that lower volatility stocks earn superior risk-adjusted returns. These approaches are being called low volatility, managed volatility, minimum variance, or similar names. They seek to exploit what has been identified in studies by academics and practitioners alike as an equity pricing anomaly. This anomaly joins previously identified persistent stock market inefficiencies associated with low price-tobook and smaller company shares. This article evaluates the low volatility anomaly, its potential causes, whether it is likely to persist, and the role, if any, of low volatility equity investing in long-term investment programs. Based on historical information, we conclude that the low volatility equity anomaly appears to exist and can be explained by certain behavioral and structural biases of investors. But its continued existence into the future is less certain. We also observe that even well-documented anomalies experience multi-year...
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...1) An Evaluation of Client Objectives and Constraints for the South Carolina State Pension Fund South Carolina State Pension Fund’s key objectives can be summarised below: Provide an asset pool sufficient to meet the long-term pensions and benefits liabilities Achieve a certain rate of return on the current pension assets for a given level of risk As a government pension plan, the fund has some understandable constraints, which are: Need to invest in mature and stable large companies Only a certain percentage of the fund could be invested in equities, meant to grow by +10% every year up to 40% The remainder (up to 60%) to be invested in bonds Their objective of achieving a certain rate of return is a necessary step to ensure the pension fund is able to meet its future pension liabilities. However, having unrealistic expectations can prove to be harmful where in their case a 1.5% discrepancy in expectations had led to a 120% increase in unfunded liability! The investment constraint of having a pension fund made up majority of bonds can prove to be problematic. While it is true that bonds provide a steady income in terms of coupon plus the opportunity for capital appreciation; the fact that bond prices are inversely proportional to interest rates prove to be a risk for pension funds. Indeed, that is the case for South Carolina pension fund where in April 1996 the fund has lost $400mln due to a rise in interest rates. Also their constraint of investing in...
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...What is Corporate Portfolio All of the assets included on the firm's balance sheet. For example, a real estate trust holds a portfolio of office rental properties. Also called investment portfolio. See also diversification Corporate Philosophy Markets are efficient The design of the portfolio as a whole should be more important than the selection of any particular security within the portfolio. The general rule is that Investors are risk averse. For a given risk level, an optimal combination of asset classes will maximize returns. Investment Style Passive Vehicle Style of investment Active Vehicle Investment Style Horizon (Long term Investment ) Life-cycle (often used in retirement plans) Asset Allocation Equities Growth Fixed Income Investments Capital Preservation Asset Allocation Asset-allocation is an attempt to provide investors with portfolio structures that address an investor's age, risk appetite and investment objectives with an appropriate apportionment of asset classes. Balance Fund Life-cycle (often used in retirement plans) Active Asset Selection Active asset selection strategies can be classified fairly broadly into four classes – Intrinsic valuation model relative valuation model technical analysis models Portfolio Optimization model How to Rebalance Your Portfolio Businesses are constantly assembling and adjusting their portfolios of assets in an attempt to increase the returns they earn and reduce the risks they face. For...
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...same amount of volatility. Their strategy was to invest in small cap stocks based on deciles. They started with the “DFA 9-10 Strategy”, in which they invested in companies chosen from the 9th and 10th deciles of the NYSE, the American Stock Exchange and the NASDAQ. Later, they added the “DFA 6-10 Strategy” and the “DFA 6-7-8 Strategy”. The implemented an active strategy by searching for attractive purchases. They screened stocks. They looked for impatient or desperate sellers. They rejected stocks that were expected to divulge news soon. They questioned themselves about the seller and the nature of the sells. Once they ensured that sellers were not selling because they had adverse information or negative private information about the stock, they then negotiated for a good price. DFA had an additional competitive advantage by creating trading efficiencies to reduce transaction cost. They charged an active management fee that was higher than passive management fees, but smaller than what the average active manager charges. It was part of their core beliefs to offer low transaction costs. They traded in blocks to extract a discount on the stock purchase, which in turn reduced transaction costs was able to extract a discount on the stock purchase. When stocks became too large, they sold them. They eventually added to their original product line until they had a full product line. They turned new academic findings into productive investment strategies. Their products were based on...
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...ROLE AND RISK & COST CONCEPT IN ACTIVE AND PASSIVE MANAGEMENT Name: Institution: Role and risk & cost concept in active and passive management Active and passive management are the two classes in which the investment strategies are categorized. Active management is whereby financial professionals try to outperform a specific benchmark. Passive funds like the exchange traded funds (ETFs) are whereby the index is tracked with no active stock selection (Barr, 2009). The risk of a failing a benchmark or index can be reduced through passive investment. Passive investment also reduces the cost. The active investment has the potential of boosting returns through outperforming some benchmarks. However, there are increased risks and also there are no guarantees that the benchmarks will be exceeded or matched. In a well-diversified portfolio, active and passive investment can flourish. The role of ETFs which is an important building block for dynamic and diverse portfolios is to offer access to equities and fixed income across large developed economies and the emerging markets. ETFs can be traded like share, thus similar liquidity is offered hence it allows the investor to adjust to their portfolios. In the context of investors’ specific objective, active management allows risks to be managed properly (Barr, 2009). Passive funds don’t neutralize risks, but they introduce benchmark risks and concentrated risks to investors and in relation to exchange-traded fund. The concept...
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...ROLE AND RISK & COST CONCEPT IN ACTIVE AND PASSIVE MANAGEMENT Name: Institution: Role and risk & cost concept in active and passive management Active and passive management are the two classes in which the investment strategies are categorized. Active management is whereby financial professionals try to outperform a specific benchmark. Passive funds like the exchange traded funds (ETFs) are whereby the index is tracked with no active stock selection (Barr, 2009). The risk of a failing a benchmark or index can be reduced through passive investment. Passive investment also reduces the cost. The active investment has the potential of boosting returns through outperforming some benchmarks. However, there are increased risks and also there are no guarantees that the benchmarks will be exceeded or matched. In a well-diversified portfolio, active and passive investment can flourish. The role of ETFs which is an important building block for dynamic and diverse portfolios is to offer access to equities and fixed income across large developed economies and the emerging markets. ETFs can be traded like share, thus similar liquidity is offered hence it allows the investor to adjust to their portfolios. In the context of investors’ specific objective, active management allows risks to be managed properly (Barr, 2009). Passive funds don’t neutralize risks, but they introduce benchmark risks and concentrated risks to investors and in relation to exchange-traded fund. The concept...
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...Ratio used to determine the risk-adjusted return of an investment portfolio. Sharpe Ratio The Sharpe Ratio introduced a method of assessing manager performance relative to risk taken. Sharpe Ratio centres on the use of a RFR, this places all mangers on a level playing field regardless of style. (Expected Portfolio Return – RFR) / Portfolio Standard Deviation Hypothetically, investors should always be able to invest government bonds and obtain the RFR. The sharpe ratio determines the expected realized return over that minimum. Within the risk-reward framework of portfolio theory, higher risk investment should produce high returns. As a result, a high Sharpe ratio indicates superior risk adjusted performance. Sharpe ratio measures a portfolio’s added value relative to its total risk. (A portfolio of risk free assets or one with an excess return of zero would have a Sharpe ratio of zero.) Sharpe ratio was based on portfolio theory, it is designed to be applied to investment strategies that have normal expected return distributions, it is not suitable for measuring investments that are expected to have asymmetric returns. Information Ratio (Portfolio Return – Benchmark Return) / Tracking Error or Active Return/Active Risk (Portfolio Return – Benchmark Return) referred to as the active return. The IR uses the SD of active returns as a measure of risk instead of the SD of the portfolio. It measures the manager’s excess return over an appropriate benchmark...
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...Thoughts on Smart Beta Chao Liu May 22 2014 The two articles in FT introduce the recent popular investment strategy: smart beta. Smart beta concept is growing popularity across the world because it has allegedly been providing investors risk-adjust excess return. Some consider smart beta approach as a strategy lies between traditional active management in which the fund managers actively pick stocks for their portfolios, and the passive management in which the investor simply replicate the market index. One way to create smart beta portfolios is to substitute the market cap weighting method with an alternative weighting, and the other more popular way is to track certain stocks or certain parts of the market using certain risk factors. These certain risk factors have been recognized to provide risk premium in academia. For example, we have learned in this semester that there are many return anomalies existed in past several decades such as small cap stock, value stock and momentum effect. Those factors are not new to investors, so investors can decide whether take these factors into consideration when forming their investment portfolios. The central questions to ask are: What sources of returns are accounted for smart beta strategies? Can smart beta strategies offer consistent higher risk-adjusted return over time? From the perspective of efficient market theory, any excess return over a market index is due to higher risk bearing. As we can learn from the two FT articles...
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...International Portfolio Management 31.03.2014 Executive Summary Tower Watson, an investment consultant company, has for main objective toward its pension clients to increase their return as high as possible while keeping as low as possible the risk taken by their investments. We are asked to analyze the pertinence for TW to recommend to its clients the Research Affiliate Financial Index (RAFI) strategy over traditional indexing and over a more actively managed strategy. The RAFI is presented to Tower Watson as a new efficient B2B tool to invest, to help investment advisory firms to better establish their strategy. Indeed this index is based on fundamental criteria instead of market capitalization criteria (and thus it has an economic-centric view instead of a market-centric view). It has been proved through studies that portfolio weights decided by fundamentals are more reliable than by price. This interesting strategy, halfway between active and passive, has shown some significant higher returns over the past years, a fact that many pension funds have already noticed since the trend today for these funds is to invest more and more in passively traded funds. Even if such strategies seem to increase the investment exposure to market fluctuation they can still be considered as “smart-beta” strategies. In the end we will have understood that TW should follow that investment tendency and purchase RAFI’s license to offer a better performing investment strategy to its pension...
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...Firstname Lastname Instructor’s Name Course Number 21 July 2012 Investment Management Investment Fundamentals Investment is the process of employing saved money in financial institutions with the hope of gaining returns in the future. Investment management is the process of managing the money employed in financial institutions with the hope of gaining positive returns. The financial institutions are catalogued in a case known as an investment portfolio. An individual with saved money may opt to invest it in financial institutions as a way of adding value to the money. Investing for individuals involves identifying the sources of income for investment such as savings and loans from others. The individual then comes up with investment objectives that will guide his investment decisions. After the funds have been secured, the investor does a market analysis to determine which the best investment opportunities available are for him. A market analysis may be done through a “bottom top” approach or a “top bottom” approach. The “top bottom approach” starts from a macroeconomic level of the market and works downwards towards the different service sectors and industries, finishing with the specific corporate institutions and their portfolio. Once at the corporate level, the investor can decide which investments will afford better returns in the long run (Klammer 36). A competitive analysis is done by the potential investor to determine how his options stand against the other investors...
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...Tel Aviv University, University of Manitoba, University of Toronto, Washington University at St. Louis, and especially an anonymous referee, for useful comments. All errors are ours. Investing in Mutual Funds when Returns are Predictable Abstract This paper analyzes the performance of portfolio strategies that invest in noload, open-end U.S. domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk-loadings, and (iii) benchmark returns. Predictability in manager skills is found to be the dominant source of investment profitability – long-only strategies that incorporate such predictability considerably outperform prior-documented “hot-hands” and “smart-money” strategies, and generate positive and significant performance with respect to the Fama-French and momentum benchmarks. Specifically, these strategies outperform their benchmarks by 2-4% per year through their ability to time industries over the business cycle. Moreover, they choose individual funds that outperform their industry benchmarks to achieve an additional 3-6% per year. Overall, our findings indicate that industries are important in locating outperforming mutual funds, and that active management adds much more value than documented by prior studies. Introduction About $4 trillion is...
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...Back to the Drawing Board Investors are having to rethink the foundations on which they build their portfolios By JOHN FERRY AND MIKE FOSTER Updated April 12, 2010 12:01 a.m. ET The recent financial crisis has all but torn up the investment rule book—received wisdoms have been found wanting if not plain wrong. Investors are being forced to decide whether the theoretical foundations upon which their portfolios are constructed need to be repaired or abandoned. Some are questioning the wisdom of investing in public markets at all. ENLARGE ROBERT NEUBECKER Many professional investors have traditionally used a technique known as modern portfolio theory to help decide which assets they should put money in. This approach examines the past returns and volatility of various asset classes and also looks at their correlation—how they perform in relation to each other. From these numbers wealth managers calculate the optimum percentage of a portfolio that should be invested in each asset class to achieve an expected rate of return for a given level of risk. It is a relatively neat construct. But it has its problems. One is that past figures for risk, return and correlation are not always a good guide to the future. In fact, they may be downright misleading. "These aren't natural sciences we're dealing with," says Kevin Gardiner, head of investment strategy for Europe, the Middle East and Africa at Barclays Wealth in London. "It's very difficult to establish underlying models and...
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