Author Archives: NYC Journals Staff

As the hedge fund industry matures, the demand arises for benchmarks to compare the performance of hedge funds to one another and to compare hedge fund performance with other asset classes. Several third parties (such as CSFB-Tremont, Hedge Fund Research (HFR), Van Hedge, and Zurich Capital Markets/MAR) have filled the demand for hedge fund benchmarksContinue reading “Hedge Fund Providers”

easuring Hedge Fund RiskThere are two standard approaches to measuring portfolio risk: the variance- based approach and the value-at-risk approach. These two approaches are not incompatible, and many portfolio managers use both.The variance of a portfolio return is the expected squared deviation of the return from its mean. If the portfolio return has a normalContinue reading “Measuring Risk”

The name “hedge funds” seems to imply risk reduction (since “hedging” is a risk reduction technique), but this need not be the case. It is better to think of a hedge fund as a fund that hedges away any risk not related to its speculative strategy. The riskiness of a hedge fund therefore depends intimatelyContinue reading “Hedge Fund Risk Management”

Strategy Categories for Hedge FundsIn order to compare performance, risk, and other characteristics, it is helpful to categorise hedge funds by their investment strategies). Strategies may be designed to be market-neutral (very low correlation to the overall market) or directional (a “bet” anticipating a specific market movement). Selection decisions may be purely systematic (based uponContinue reading “Hedge Fund Strategies”

Long Term Capital ManagementDuring the late 90s, the largest tremor through the hedge fund industry was the collapse of the hedge fund Long-Term Capital Management (LTCM). LTCM was the premier quantitative-strategy hedge fund, and its managing partners came from the very top tier of Wall Street and academia. From 1995- 1997, LTCM had an annualContinue reading “Long Term Capital Management”

By the mid-1960s, Jones’ fund was still active and began to inspire imitations, some from investment managers who once worked for Jones. An SEC report documented 140 live hedge funds in 1968 [President’s Working Group, 1999]. A stock market boom began in the late 60’s, led by a group of stocks dubbed the Nifty Fifty,Continue reading “Hedge Funds from the 1960s to the 1990s”

The presence of incentive fees and high water marks may complicate the calculations of the value of investors’ shares. If investors purchase shares at different times with different net asset values (NAV), naïve calculations of incentive fees may treat the investors differently. For example, presume shares in a hypothetical hedge fund are originally worth £100Continue reading “Fund Equalisation”

Hedge funds are clearly recognisable by their legal structures. Many people think that hedge funds are completely unregulated, but it is more accurate to say that hedge funds are structured to take advantage of exemptions in regulations. Fung and Hsieh (1999) explain the justification for these exemptions is that the regulations are meant for theContinue reading “The Legal Structures of Hedge Funds”

The First Hedge FundIn 1949, Alfred Winslow Jones started an investment partnership that is regarded as the first hedge fund. Remarkably many of the ideas that he introduced over fifty years ago remain fundamental to today’s hedge fund industry.Jones structured his fund to be exempt from the SEC regulations described in the Investment Company ActContinue reading “The History of Hedge Funds”

Hedge Fund Investing & Regulation Hedge funds are pooled investment vehicles that can invest in a wide variety of products, including derivatives, foreign exchange, and publicly traded securities. Highly publicized reports of both disastrous and wildly successful hedge funds don’t always make it readily apparent how volatile a given hedge fund strategy may be. MostContinue reading “What is a Hedge Fund”

Options are a form of derivative financial instrument in which two parties contractually agree to transact an asset at a specified price before a future date. They have gotten much more popular in recent years, and are a staple of the legendary Reddit forum r/Wall StreetBets. Options are extremely lucrative but extremely risky. An optionContinue reading “Options”

Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. Transactions in financial derivatives should be treated as separate transactions rather than as integral parts of the value of underlying transactions toContinue reading “Derivatives”

In return for receiving a premium, the seller of a put assumes the obligation to buy the underlying stock at the strike price at any time until the expiration date. Stock options in the U.S. typically cover 100 shares. Therefore, in the example above, the investor receives $3.00 per share ($300 less commissions) and assumesContinue reading “Cash Secured Puts”

Expiration and Option Value Time left to expiry is an important component in an option’s formula. This value is known as Theta. The further away the expiration date of the contract is, the higher the value of the option is going to be. With a bigger time-lapse, the underlying asset is more likely to haveContinue reading “Options & Exp. Date”

Delta, which can help you gauge the likelihood an option will expire in-the-money (ITM), meaning its strike price is below (for calls) or above (for puts) the underlying security’s market price. Gamma, which can help you estimate how much the Delta might change if the stock price changes. Theta, which can help you measure howContinue reading “Options and the Greeks”