Course Overview

This course is an in-depth study on the theory and management of hedge funds, in particular market-neutral funds and funds with various controled levels of risk exposure. We will focus on their controled-risk strategies, including equity strategies (market-neutral, long/short, etc), derivatives arbitrage, convertible arbitrage, fixed income arbitrage, and currency and global macro arbitrage. We will pay attention to issues at the operational level. Topics will include hedge fund compensation, performance evaluation, risk management, and the role of arbitrageurs in the capital market.

The course project involves four steps. Step 1. select a hedge fund strategy (based on your own experience and reading of the literature, or based on your research). You may also do some back-testing of your strategy before taking the next step to make sure that you can have enough confidence in your strategy. If possible, start right away to track a paper portfolio and keep the daily performance numbers, which you can then analyze and include your report and presentation. You can track your strategy’s performance on Yahoo Finance or Stock Trak (www.stocktrak.com). You should also track the daily changes in the market indices that you may later need to evaluate your fund’s performance. While tracking your strategy’s performance, you can make changes to your portfolio positions on a forward-going basis (not retroactively). But, if and when you make changes, you should apply a 0.5% transaction fee. Step 2. conduct a performance evaluation and a performance attribution across market indices and well-known factors, for each of (1) the historical performance of the hedge fund style to which your chosen strategy belongs, (2) your back-test performance results of your strategy if you have those numbers, and (3) your paper portfolio’s daily returns before November 15. You can use the S&P 500 and the NASDAQ Composite index as the two factors to take out the performance that is due to systematic risk. Step 3: After doing the performance evaluations, write a comprehensive report discussing why your hedge fund strategy is attractive and summarizing the performance evaluation results (to support your why arguments). Besides writing such a group report of 12+ pages, turn in a PPT presentation for your report. You should write both your report and PPT presentation as a hedge fund business plan/proposal, with potential investors as your target audience. In other words, your report and PPT presentation should be convincing to potential investors. The due date for the report and the PPT presentation is December 12, on which date two groups will be selected to present to the class.