Hedge Fund Industry Strategy

34% Long/Short Equity
16% Event Driven
8% Global Macro, Convertible Bond, Fixed Income
6% Equity Market Neutral, Emerging Markets
7% Managed Futures, Other

Arbitrages

American Depositary Receipt Arbitrage – between ADR and local shares
Off-the-run and on-the-run 30yr bonds – betting on the narrowing of spread

Short Selling

Risks
      - Unlimited downside
      - Short squeeze
      - Dividend payout
      - Up-tick rule
      - Call-in

Long/Short Equity
      - Buy cheap and sell expensive
      - Share class arbitrage
      - Pairs trading between two companies in same industry
      - Buy stock and sell out-of-the-money call

Merger Arbitrage
      - Merger and acquisition

Fixed Income Arbitrage – Exploit misprices in the market, opposite of directional trading
      - Issuance driven – on-the-run and next to last treasuries with similar maturity dates will converrt
      - Yield curve arbitrage – butterfly trade – open a position between two different maturities
            • Yield curve flattener – short short maturity and long long maturity, betting that short rate would go up because of volatility
            • Yield curve steepener – long short maturity and short long maturity, taking a short position on volatility
            • Butterfly – betting the curve would become smooth
      - Intermarket spread – two yield curves of different currencies
      - Basis trading – between price of a future contract and the price of the instrument to be delivered
      - Swap Spread – between an interest rate swap and a treasury having similar duration
      - Carry Trade – buying bonds with yield higher than the cost of borrowing
            • intra-curve – borrowing at 3-mo to purchase 10-yr
            • inter-curve – borrowing US treasury to purchase foreign treasury
            • Low cost of capital makes money easy to come by
      - Treasury-over-Eurodollar (TED) Spread
      - Long/Short Credit or Credit Pair Trading
            • High-yield bond market accounts for about 20% of corporate bonds
            • CDS makes it possible to have credit exposure without the underlying bonds
            • Long/Short bonds of companies with similar fundamentals betting yield spread would converge
            • Long equity tranche of CDO, short credit using CDS, financed by shorting senior tranche

CDO
      - CLO – Collateralized Loan Obligation
      - CBO – Collateralized Bond Obligation
      - ABS – Asset Backed
      - SCO – Synthetic Collateralized Obligation from CDS
      - CDO – CDO from a bucket of CDOs

      - Sources of cash flow
            • Home Equity
            • Credit Card
            • Auto Loan
            • Student Loan
            • Equipment Leases

      - Tranche Ratings
            • Aaa, Aa, A – OK
            • Baa, Ba, B – over 90% combined default