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 Convertible Bond Arbitrage: This strategy primarily involves taking long positions in convertible bonds or warrants, hedged with a short position, typically in the underlying stock. Convertible bonds and warrants (as derivatives) are priced as a function of the price of the underlying stock, expected future volatility of returns, risk-free interest rates and the issuer-specific corporate Treasury yield spread. However, in many cases, convertible bonds and warrants are not accurately priced due to illiquidity in the convertible debt and warrant markets as compared to the markets in the underlying common stocks, uncertainty concerning the call or redemption features of convertible securities and lesser market focus on these derivatives as opposed to the equities into which they are convertible or exercisable. These mispricings may give rise to significant profit opportunities, as positions are acquired in anticipation of the market price eventually reflecting true value. Directional Equity: This strategy involves investments, long or short, in equities. Traditional equity value and growth hedge funds purchase stocks which they perceive to be undervalued and sell stocks which they perceive to be overvalued. The research-intensive efforts employed in identifying promising stocks to hold long in a portfolio may also provide short-sale opportunities, and for this reason many directional equity funds often maintain both long and short portfolios. While the long side generally outweighs the short side in most directional equity funds, there is also a small group of short-biased funds in which the short side as a general matter exceeds the long side, sometimes by a significant margin. Emerging Markets: Emerging markets strategies focus on traditional fixed income, value and growth equity investments in markets outside of the United States and Western Europe, including Asia and Latin America as well as Eastern Europe, Africa and the less developed Mediterranean economies. Emerging markets are highly volatile and information relating to the securities traded in these markets is often difficult to obtain. Such inefficient markets offer excellent opportunities for the resourceful manager. Event-Driven: Event-driven strategies involve investments, long or short, in the securities of corporations undergoing significant change (e.g., spin-offs, mergers, liquidations, bankruptcies). Such change often provides managers with a tangible catalyst by which the manager may be able to realize the expected change in value in the underlying security. Substantial profits may be generated by managers who correctly analyze the impact of the anticipated corporate event, predict the course of restructuring and take positions accordingly. Fixed-Income Arbitrage: Fixed income arbitrage attempts to capture mispricings which develop between related classes of fixed income securities — mispricings which may be exploited, on a leveraged basis, for significant returns. This general strategy type include basis (e.g., cash vs. futures), yield-curve and credit spread trading, as well as volatility arbitrage. An unusually high degree of leverage is often available, and often emphasized, in fixed income arbitrage. Global Macro: Global macro funds invest in those markets and instruments which they believe provide the best opportunity. At any given time, global macro managers may take positions in currencies, debt, equities or commodities. Global macro managers may elect to take outright directional positions; and, depending on their own expertise and the risk-return profile of the markets in which they are trading, they may also elect to take relative value positions, where a long position or set of positions is dynamically paired off against a short position or set of positions. Hedged Equities: Hedged equities strategies attempt to manage the risk of overall market movements by taking balanced long and short positions in the common stock of different issuers. The objective is to be long the stock likely to outperform, and short the stock likely to underperform, the market. Many of the Portfolio Managers who implement these strategies may also attempt to neutralize net exposures to different industry sectors, market capitalization classes and overall portfolio betas by offsetting their long and short portfolios. Mortgage Arbitrage: The yield on mortgage-backed securities is typically higher than that on comparable Treasury notes or bonds, in large part as a result of the premium associated with the prepayment risk imbedded in pass-through mortgage securities. Mortgage arbitrage managers typically take long mortgage-backed positions and attempt to hedge interest-rate, prepayment and other risks. Substantial profits may be realized if the portfolio manager is able to purchase undervalued securities and hedge properly against interest rate prepayment and other risks. Risk/Merger Arbitrage: This strategy involves transaction-specific analysis seeking to profit by acquiring securities which are discounted from the value to be paid for them in a proposed merger or acquisition due to the uncertainty of transaction timing and completion. The difficulty is in analyzing the risk of delay or non-completion and determining when during the period from the commencement of a proposed merger or acquisition to the conclusion (successful or unsuccessful) of the transaction it is most efficient — on a present value basis — to take a position. Risk/merger arbitrage managers typically seek speculative profits from the purchase of shares in forecasted acquisition targets, while maintaining defensive positions through hedges in acquiring companies and disciplined risk management. Trading & Arbitrage: Investment strategies that identify and monetize financial market inefficiencies, anomalies and mispricings. These managers seek to predict movements in the absolute or relative prices of individual securities, groups of securities or entire asset classes on both an inter and intra market basis. Fund of Funds: This strategy involves portfolio managers investing in multiple underlying investment vehicles which are managed by third-party managers. Fund of funds strategies can be focused on any of the strategies described above or may be broadly diversified and include any combination of the strategies described above. |
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