Trading Strategies


Convertible Arbitrage

- This strategy entails procuring long-only positions
in convertible bonds or warrants and the subsequent shorting of
the corresponding stock. The bond and warrant pricing is based on
several criteria, including price of the underlying stock, and the expected
future volatility of returns. Such pricing is often inaccurate due to
illiquidity in the convertible debt and warrant markets, giving rise to
profit opportunities as positions are acquired in anticipation of
the market price eventually reflecting true value.

Distressed Securities

- This strategy looks to public companies or a
country’s central bank for securities that are either in default, in
under bankruptcy protection or are likely to soon descend into
such unfavorable status.For fixed income instruments, which comprise
the lion’s share of the overall asset class, distressed securities
are classified as being below investment grade, have a yield in
excess of 1000 basis points over the risk-free rate of return on U.S.
Treasuries and may include corporate credit as well as issuance by
emerging market governments.

Emerging Markets

- This strategy focuses on traditional fixed income
and equity markets outside the United States and Western Europe,
including those in Asia, Latin America, Eastern Europe and Africa.
Considered highly volatile, with less reliable and less standardized
information available about their securities, these markets tend to
exhibit inefficiencies resourceful managers can exploit.

Equity Long Bias

- Simply stated, this strategy takes predominantly long
positions that are minimally hedged, thereby making it more vulnerable
to market declines. Most funds typically have a long bias because,
over the long term, stock markets tend to rise along with general economic

Equity Long/Short

- Managers of this strategy typically buy stocks they
perceive to be undervalued while shorting those they perceive to be
overvalued. They routinely target competing companies within the
same industry sector for opposing positions, which theoretically provides
downside risk protection in any market climate. While the long
side generally outweighs the short side in most directional equity
funds, a small group of funds exhibit short sides that exceed the long
sides - sometimes by significant margins.

Equity Long-Only

- Containing absolutely no short positions whatsoever,
this strategy appeals to managers who believe there are limits to
the number of compelling short ideas and that the recent flood of
money into hedge fund investments has hampered their ability to
exploit those rare short ideas that do arise. Though some argue that
long-only funds betray the definition of hedge funds by failing to exploit
their ability to generate returns independent of the underlying assets
they invest in, others maintain that long-only funds still fit the
given that they may employ leveraging techniques and that they
impose the traditional 2% management/20% incentive fee structure.

Equity Market Neutral

- This strategy aims to capitalize on investment
opportunities unique to some specific group of stocks while
maintaining a neutral exposure to a broader group of names
defined by sector, industry, market capitalization or geographical
region. Such a strategy is a favorite among managers with a
propensity for ferreting out solid stock picks, particularly those who
can identify a virtually equal number of names to both long and
short within a larger group. Overall sector performance is largely
immaterial because, no matter what happens, the gains and losses
of the selected stocks will offset one another.

Event Driven

- This strategy involves investments - both long and
short - in the securities of corporations experiencing significant
events of note, such as mergers, acquisitions, liquidations, bankruptcies
or reorganizations. Such tangible events can catalyze
changes in the expected value of the underlying security.
Significant profits may be enjoyed by savvy managers who can
correctly interpret what the projected corporate event will mean
for a company’s bottom line and take positions accordingly.
Anticipating timelines for the effect of such events to take place
can be hard to predict, making the event-driven game one of the
more speculative strategies.

Fixed Income Arbitrage

– This strategy aims to exploit the price differences
between related short-term bonds from either public or
private issuers. These mispricings, which may be exploited on a
leveraged basis, yield a contractually fixed stream of income, letting
arbitrageurs adhere to their mandate of achieving steady
returns with a low degree of volatility. Most managers who employ
this strategy trade on a global basis and tend to focus on interest
rate swaps, U.S. Treasury securities and yield curve and credit
spread trading, as well as volatility arbitrage.


– Managers of this strategy invest in a bevy of different
investments - including long and short positions in various equity,
fixed income, currency and futures markets - basing their decisions
on the present economic and political climate that a particular
region is experiencing. For example, if a manager believes the U.S.
is headed into recession, he might elect to sell short U.S. stocks or
futures contracts on certain U.S. indices.

Merger Arbitrage

- This strategy involves a transaction-specific
event, in which the stocks of two merging companies are simultaneously
bought and sold to create a riskless profit. Specifically, the
manager examines the risk of the merger deal failing to close on
time—an uncertainty that typically causes the target company’s
stock to sell at a discount to the price that the combined company
will fetch when the merger is closed. Where a regular manager
focuses on the profitability of the merged entity, a merger arbitrageur
cares about the probability of the deal’s approval and the
likely timetable for the deal to transpire.


– Managers of this strategy employ several hedging
techniques within the same pool of assets, with the objective
of delivering consistently positive returns regardless of the directional
movement in equity, interest rate or currency markets. An
alternative to funds of funds, the multi-strategy paradigm targets
a wide scope of asset classes, including long/short equities, real
estate investments, event-driven strategies and convertible bond
arbitrage, and relies on diversification to reduce volatility and
decrease single-strategy risk. Only funds with significant capital
on their balance sheets have the resources needed to effectively
employ this strategy.

Fund of Funds

- A portfolio of underlying managers, this strategy is
also known as multi-manager investing. The advantage of such a
vehicle is its built-in diversity, but the higher fees associated with
this product have made some investors leery.

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