What Hedge Funds Really Do, livre ebook

This book draws the curtain back on the core building blocks of many hedge fund strategies.

What do hedge funds really do? These lightly regulated funds continually innovate new investing and trading strategies to take advantage of temporary mispricing of assets (when their market price deviates from their intrinsic value). These techniques are shrouded in mystery, which permits hedge fund managers to charge exceptionally high fees. While the details of each fund’s approach are carefully guarded trade secrets, this book draws the curtain back on the core building blocks of many hedge fund strategies.

As an instructional text, it will assist two types of students:

• Economics and finance students interested in understanding what “quants” do, and
• Software specialists interested in applying their skills to programming trading systems.

What Hedge Funds Really Do provides a needed complement to journalistic accounts of the hedge fund industry, to deepen the understanding of nonspecialist readers such as policy makers, journalists, and individual investors.

The book is organized in modules to allow different readers to focus on the elements of this topic that most interest them. Its authors are a fund practitioner and a computer scientist (Balch), in collaboration with a public policy economist and finance academic (Romero).

Part I The Basics .................................................................. 1 

Chapter 1 Introduction 3 

Chapter 2 So You Want to Be a Hedge Fund Manager 9 

Chapter 3 An Illustrative Hedge Fund Strategy: Arbitrage 21 

Chapter 4 Market-Making Mechanics 25 

Chapter 5 Introduction to Company Valuation 31 

Part II Investing Fundamentals: CAPM and EMH ............. 41 

Chapter 6 How Valuation Is Used by Hedge Funds 43 

Chapter 7 Framework for Investing: The Capital Asset Pricing Model (CAPM) 47 

Chapter 8 The Efficient Market Hypothesis (EMH)—Its Three Versions 55 

Chapter 9 The Fundamental Law of Active Portfolio Management 59 

Part III Market Simulation and Portfolio Construction ....... 69 

Chapter 10 Modern Portfolio Theory: The Efficient Frontier and Portfolio Optimization 71 

Chapter 11 Event Studies 81 

Chapter 12 Overcoming Data Quirks to Design Trading Strategies 87 

Chapter 13 Data Sources 93 

Chapter 14 Back Testing Strategies 97 

Part IV Case Study and Issues ............................................ 103 

Chapter 15 Hedge Fund Case Study: Long Term Capital Management (LTCM) 105 

Chapter 16 Opportunities and Challenges for Hedge Funds 111

Teaching Cases ....................................................................................119 

Glossary .............................................................................................121 

Summary ...........................................................................................131 

Index .................................................................................................133