Single Manager Hedge Fund
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In short, hedge funds are investment funds that raise capital from institutional and institutional investors and then invest in financial assets, usually liquid, publicly traded assets.
Single Manager Hedge Fund
They seek investments that reduce risk while beating the overall market or earning market returns, and use a wider variety of strategies than traditional mutual funds and asset management firms.
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In return, they charge higher fees than mutual funds, including management fees for the assets under management and a percentage of investment profits known as “carries.”
Hedge funds and private equity are somewhat similar, but PE firms recruit slightly different types of candidates, focusing on buying and selling entire companies rather than individual securities. See our hedge funds and private equity information for more.
You can classify hedge funds by dozens of criteria, but most of these criteria are useless.
For example, you may want a fund with a certain “culture,” such as a relaxed environment with unique, artistic people.
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That’s great, but good luck finding matching assets with LinkedIn, Capital IQ, and other online databases.
In most cases, you should start thinking about asset class because it is most closely related to your fund’s ability to perform.
In other words, if you are at the exchange desk, you can trade government bonds or interest rate derivatives in hedge funds that use these products in their strategies.
On the other hand, long/short stock funds are not very favorable because you are not analyzing and evaluating individual companies.
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The most basic strategy is to take long positions in stocks that appear to be undervalued and short positions in stocks that are overvalued.
A “short” position means a fund borrows a stock, sells the stock at a higher price, and then tries to buy it back at a lower price.
Subcategory: The most popular strategy here is long/short stocks, which tries to go long and short a variety of stocks, usually targeting a certain net worth of the portfolio.
For example, a fund with 70% long and 30% short positions has a net risk of 40%, assuming no leverage is used.
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As in this example, many funds are market neutral (net exposure close to zero), while others are short skewed.
At the more extreme end, there are long-term and short-term only funds in this category. Real short-term strategies are very risky because the potential losses are infinite, which is rarely the case.
The industry focus is very diverse, and you’ll see everything from niche industry specialists (for example, biotech companies that use one specific technology) to general funds and groups.
Trading example: Coke looks cheap, so you buy $100,000 of stock expecting the stock to go up.
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To protect yourself, you can short a target ETF that tracks similar companies (ie: Pepsi) or consumer/retail companies that seem overpriced.
But if you are wrong in one part of this trade, you can win and still make money
For example, if Coke is up 30% and Pepsi is up 25%, you’re still up 5%, even if you’re wrong about Pepsi falling.
Required skill set: For a non-quantitative role, you will need to have a strong understanding of accounting, financial statement analysis, valuation and financial modeling as you will be constantly evaluating companies.
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In a single-manager fund, you need to dive deep into companies through channel checks and personal research, and in a multi-manager fund, you manage multiple companies, update your model based on recent performance, and take positions. right.
Most Likely Candidates: Many investment bankers join these types of funds, but equity research specialists and investment analysts at traditional asset management firms and mutual funds end up here.
Traders are not well positioned in these roles unless the fund makes heavy use of options or the trader is willing to trade rather than make investment decisions.
Examples of dedicated funds for this category: Viking Global Investors, Select Equity, Baupost Group, Egerton Capital, Maverick Capital, Lone Pine Capital.
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Definition: Credit strategies are similar to equity strategies in that they take long and short positions in securities, but are based on debt securities and their derivatives (eg, corporate bonds, municipal bonds, government bonds, credit default swaps, etc.). ).
So you spend less time valuing entire companies and more time valuing the downside risk of certain types of debt – because most fixed income growth is limited.
, you are unlikely to find a bill with a lot of errors. A lot of the funds here aim to reach singles and doubles.
Subcategories: The most basic strategies are simple long loans and short loans, and some groups focus on specific types of debt, such as mortgage-backed or asset-backed securities, mezzanine or other high-yield debt.
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Many firms do not focus on investment-grade debt because of the difficulty of finding spreads and the low ticket prices.
Trading example: Company X’s unsecured bond A has a coupon rate of 7%, is trading at 90% of par, and has a maturity of 3 years. I don’t think you’re underestimating the company’s loan repayment risk, which is much lower than the market expects, and is likely to be fully repaid.
A long-term unsecured bond with an approximate annual potential return of 7% + (10% / 3) = ~10%.
To protect against default risk, the company buys credit default swaps (CDS) on bonds in case the company defaults within 3 years.
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Required skill set: Must be familiar with bond math (ie, how to approximate yield to maturity) and the specifics of a variety of securities, including interest rate swaps and credit default hedging.
Traditional financial modeling exists because you need a 3-statement model to evaluate a bad-scenario company deal, and you need a valuation because you need to calculate the repayment percentage of different debt payments.
Also, although it’s not a universal rule, many credit pools take a “broad, not deep” approach, so you should be comfortable covering many names rather than diving deep into a few.
Most Likely Candidates: Some investment bankers and research professionals (more on the credit research side) are moving to funds that use credit strategies, but traders with desk experience in commercial interest and distressed debt are competitive.
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It also depends on whether the fund uses more of a “research” approach or a “commercial” approach; both are available in this section.
Examples of funds in this category include: Capula Investment Management, III Capital, Benefit Street Partners, Symmetry Investments, Silver Point Capital and Saba Capital.
Definition: In essence, all hedge funds use “event-driven” strategies because catalysts are a key component of all investments – even simple long/short stock moves.
On specific events such as mergers, acquisitions, spin-offs, separations, bankruptcies, restructurings, reinvestments, IPOs, SPAC scams, and even ordinary earnings calls.
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When one of these events occurs, the market misprices one or more securities associated with the event, especially in the early stages.
Often, hedge funds that use these strategies profit from mispricing by going long on one security in the same company’s capital structure and shorting another security.
Subcategories: For example, special situations (splits, equity real estate, equity real estate IPOs, IPOs, litigation, etc.), distressed debt (see all of our coverage – distressed private equity and distressed debt transactions) and merger arbitration.
There is a general “opportunistic” strategy of waiting for events and adapting as needed without focusing on one specific type of event.
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Finally, activist funds that buy large stakes in public companies to influence the company’s strategy also fall into this category.
Trade example: Company A is going to announce the acquisition of 100% of Company B’s stock next week.
Company A can trade for $100 per share, Company B for $50 per share, and Company A can pay Company B 20% ($60 per share).
You believe the deal will go through, but Company A is paying Company B about $5 per share more than its stock is worth.
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So you want to buy B stock because it should be close to $60/share once the deal is announced, and you short A stock, hoping it will fall after the deal is announced and the market reacts.
Required skill sets: You must be very familiar with company valuations and transaction modeling and know all the intricacies of distressed debt restructuring and bankruptcy processes, including lengthy and tedious legal documents.
Most Likely Candidates: Bankers with M&A and restructuring experience often enter these funds; It’s more difficult if you’re coming from the stock market.
If you have experience in asset research or sales and trading, as these roles are not transactional, you will be well placed for these assets (exceptions apply to some tables).
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Examples of funds for this category: Elliott