Alternative Investments for Portfolio Management

Hedge Fund Strategy

Equity Strategy

Long/Short Equity

Dedicated Short Selling and Short-biased

bottom up

Equity Market Neutral (EMN)

Sample Text: Overall, EMN managers are more useful for portfolio allocation during periods of non-trending or declining markets. EMN hedge fund strategies take opposite (long and short) positions in similar or related equities having divergent valuations while attempting to maintain a near net zero portfolio exposure to the market. EMN managers neutralize market risk by constructing their portfolios such that the expected portfolio beta is approximately equal to zero. Moreover, EMN managers often choose to set the betas for sectors or industries as well as for common risk factors (e.g., market size, price-to-earnings ratio, and book-to-market ratio) equal to zero. Since these portfolios do not take beta risk and attempt to neutralize many other factor risks, they typically must apply leverage to the long and short positions to achieve a meaningful return profile from their individual stock selections. 因为风险小,return小,所以加杠杆才能扩大收益

EMN strategies typically deliver return profiles that are steadier and less volatile than those of many other hedge strategy areas. Over time, their conservative and constrained approach typically results in a less dynamic overall return profile than those of managers who accept beta exposure. Despite the use of substantial leverage and because of their more standard and overall steady risk/return profiles, equity market-neutral managers are often a preferred replacement for fixed-income managers during periods when fixed-income returns are unattractively low.

Event-Driven Strategy

Merger Arbitrage

Merger arbitrage is a good uncorrelated source of alpha.

If the merger successes, then use the T stock to A stock, and take cost difference.

If the merger fails, then prices should revert back to their pre-merger announcement levels


Buy target, T


Buy share of T, sell share of A. Because A issue share to buy T, then share price to A decrease, and demand of A stock increase, so A price increase.

Overall Characteristics:


Distressed Securities

Focus on firms that are (1) in bankruptcy, (2) under financial stress. Focus on:


Sample Text: Event-driven strategies, such as merger arbitrage, tend to be exposed to some natural equity market beta risk. Event-driven merger arbitrage strategies have market sensitivity and left-tail risk attributes. Also, while event-driven strategies may have less beta exposure than simple, long-only beta allocations, the higher hedge fund fees effectively result in a particularly expensive form of embedded beta. 由于会受tail risk影响,而全部白给

Relative Value Strategy

Fixed-Income Arbitrage

Return profile is like put option.

Convertible Bond Arbitrage

long short volatility 与 long short option方向一致,因为option 与 vol 正相关

Convertible bond = straight debt + long equity call option

Convertible bond is complex structured, so generally under-valued. Buy Convertible bond, short corresponding # of stocks.

If the convertible bond’s current price is near the conversion value, then the combination of a long convertible and short equity delta exposure will create a situation where for small changes in the share price and ignoring dividends and borrowing costs, the profit/loss will be the same.

Opportunistic Hedge Fund

Global Macro Strategy

Managed Futures


Specialist Strategies

Volatility Trading

Roll down: Source and buy cheap volatility and sell more expensive volatility, earn premium

Equities and volatility are negatively correlated. In order to hedge the equity exposure in the portfolio, a long volatility position is necessary.

VIX option和stock之间可以diversify

Reinsurance and Life Settlements

Hedge Fund 会一次性买一个 pool的保单, pay lump sum fee 一次性一笔的买断费,然后pay ongoing premium payments 按期付保费,在受保人die 的时候挣 death benefits:

Multi-Manager Strategy

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FoF一定有 double layer fees: FoFs have double layers of fees without being able to net performance fees on individual managers. The FoF investor always faces netting risk and is responsible for paying performance fees that are due to winning underlying funds while suffering return drag from the performance of losing underlying funds. Even if the FoF’s overall performance (aggregated across all funds) is flat or down, FoF investors must still pay incentive fees that are due to the managers of the winning underlying funds.

MSF (Multi-Strategy Fund) 的 fee 可以内部抵消(gain 的 loss 的可以net)The fee structure is more investor friendly at MSFs, where the general partner absorbs the netting risk arising from the divergent performance of the fund’s different strategy teams. This is an attractive outcome for the MSF investor because (1) the GP is responsible for netting risk and (2) the only investor-level incentive fees paid are those due on the total fund performance after netting the positive and negative performances of the various strategy teams.

MSF更方便切换战略做TAA,因为内部有自己的小团队MSFs can reallocate capital into different strategy areas more quickly and efficiently than is possible in FoFs, allowing MSFs to react faster to real-time market impacts. This shorter tactical reaction time, combined with MSFs’ better strategy transparency, makes MSFs more resilient than FoFs in preserving capital.

FoF的FM更多,所以operational risks diversidied,但是MSF相对应内部有一大堆FM,还是有较高concentrated operational risks. MSFs have higher manager-specific operational risks than FoFs. In MSFs, teams of managers dedicated to running different hedge fund strategies share operational and risk management systems under the same roof. This means that the MSF’s operational risks are not well diversified because all operational processes are performed under the same fund structure. FoFs, in contrast, have less operational risk because each separate underlying hedge fund is responsible for its own risk management

More Sample Text:

  1. Multi-strategy managers like Hedge Fund B can reallocate capital into different strategy areas more quickly and efficiently than would be possible by a fund-of-funds (FoF) manager like Hedge Fund C. The multi-strategy manager has full transparency and a better picture of the interactions of the different teams’ portfolio risks than would ever be possible for FoF managers to achieve. Consequently, the multi-strategy manager can react faster to different real-time market impacts—for example, by rapidly increasing or decreasing leverage within different strategies depending upon the perceived riskiness of available opportunities.

  2. The fees paid by investors in a multi-strategy fund can be structured in a number of ways, some of which can be very attractive when compared to the FoFs’ added fee layering and netting risk attributes. Conceptually, FoF investors always face netting risk, whereby they are responsible for paying performance fees due to winning underlying funds while suffering return drag from the performance of losing underlying funds. Even if the FoF’s overall performance is flat or down, FoF investors must still pay incentive fees due to the managers of winning funds.

Multistrategy funds typically use more leverage and have more volatile return profiles than funds of funds.

Multistrategy funds have faster reaction times for tactical allocation changes.

Funds of funds potentially offer a more diverse mix of strategies.

Analysis of Hedge Fund Strategy

Conditional Factor Risk model - turbulent market period

in order to analyse whether hedge fund risk exposures that are insignificant during calm market periods may become significant during turbulent market period.


The Unexplained Returns are (1) alpha; (2) alpha (FM investment skills); (3) omitted factor; (4) random error

Conditional Factor Risk Model

reg HF return on

  1. Equity Risks (S&P500) 整个市场的风险

  2. Currency Risks (USD) 外汇风险

  3. Credit Risks (CREDIT) 债券风险

  4. Volatility Risks (VIX) Options风险

Traditional Portfolio: 60/40 Equity/Debt

If hedge fund is added, there could increase Sharpe and Sortino ratios, and diversify risks. 降低风险 提高收益

Risk-Adjusted Measure


the higher the drawdown, the greater the tail risks

Alternative Investment


Commodity * 4

  1. Metals

  2. Energy

  3. Livestock/ Meat

  4. Agriculture

Invest in (1) future (2) 实物 farmland

Real Estate

Public real estate has had a fairly high, positive correlation with equities, as well as a high, positive equity beta. In contrast, fixed income has broadly had a negative correlation with equity and a small but negative equity beta. Switching from fixed income to real estate will likely decrease portfolio diversification and increase return volatility.

Investment Consideration

Asset Classification


如果说: Risk-Based Approach does equally well accounting for risk levels of alternative assets as it does for publicly traded assets.

False: 因为 PE or Alternatives 不是定期report,data are non-continuous, so use appraisal data. Data are smoothed, 低估 vol,低估 corr, making diversification benefits

stale pricing和smoothing是同源的。因为另类资产因为没有活跃的交易价格,因此定价一般都是过时的(stale pricing),所以会用 appraisal data估算另类资产的价值,导致另类资产的收益率是smoothing的,从而在进行MVO的时候会把过多的权重给另类资产。 MVO会因为另类资产stale pricing的原因,低估风险,因此会把过多的权重配给另类资产。这是没错的。

Investment Consideration

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Suitability Consideration

In sum, alternatives are suitable to high risk tolerance investors.

Soft Skills

P.S. 与 soft skill 对应的是 technical skills 包含: capital market proficiency, portfolio construction ability, financial planning knowledge, technology skills, language skill 多会说一种外语

Approach to Asset Allocation

Liquidity Planning

NAV net asset value 资产净值 , by BASE



Avoid Cash Drag

为了保证 Capital Contribution / call 的时候有钱可以投进去,又避免持有 cash 导致 return过低。

在 call 之前,把准备投

  1. 投 PE 的钱,投 Public Equity

  2. 投 RE 的钱,投 REITs (public real estate investments 为大类,其中 REITs 是其中之一)

Prepare for Unexpectation (Stress-test)

Stress test for unexpected events

Performance Evaluation



Monitor the Investment Program