Strategies
Content

Theory

Market neutral
◦ Portfolio Management
◦ Risk Management
◦
◦
◦
◦
Long short
beta
Alpha investors
Smart beta
 Different way to order your market, alternative weightings
◦ Arbitrage




Market making/liquidity provider
Models (oil vs oil)
M&A
Convertible bonds
2
Motivation: Investment Competition

Diversification increases the Sharpe Ratio (SR)
Improved SR  Improved M2!
8%
7%
6%
65% M. Eriksen, 35% B.
Stinson
SR = 0.42
5%
Return

4%
SR =
100% M. Eriksen
SR = 0.3
3%
𝑟𝑝−𝑟𝑓
σ𝑝
with rf = 1%
2%
1%
0%
0%
5%
10%
15%
20%
25%
Volatility
3
4
Rollende Korrelationen (3-Jahresdurchschnitt)
Stability of Correlation
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1976 78 80 82 84 86 88 90
92 94 96 98 2000 02 04 06
2009
5
1987 (normalized log)
6
2008(normalized log)
7

https://www.portfoliovisualizer.com/assetcorrelations
8
Motivation: Asset Allocations is
essential
Contribution to
Performance
70 – 90%
Strategy
(long-term asset allocation)
Tactic (short-term asset
5 – 25%
1 - 5%
allocation due to
market timing)
Stock
Picking
9
Market Model or CAPM

𝑅 𝑗, 𝑡 − 𝑅𝑓 𝑚, 𝑡 = 𝛼 + 𝛽 𝑅 𝑚, 𝑡 − 𝑅𝑓 𝑚, 𝑡
α= 0 for no abnormal returns

Explain alpha and beta

+𝜖
10
Portfolio management


What is the influence of your positions on
your portfolio
Correlation
◦ σP2 = wA2 * σA2 + wB2 * σB2 + 2 wAwB * σAB
◦ ρAB = σAB / (σA * σB)
11
What to do

Hedge the risk you do not want
◦ Make the correlation go away
12
Long/Short



Value investing: don’t pair them but look at
company values (over/undervalued)
Paired trading: buying and selling two related
stocks to limit market risk.
Goal:
◦ Long increase more during bull
◦ Short decrease more during bear
◦ Minimize market exposure
13
Long/Short


Market neutral: 4,6%
Long/Short: 9,29%
14
Risk Arbitrage


Benefit from price differences between
related items
Risk Arbitrage
◦
◦
◦
◦
looks a lot like normal investing
M&A
Liquidation
Convertible bonds
15
Arbitrage returns

Mortgage:
◦ 5%-8,7%

Swap Spread:
◦ 3,7%-6.8%

Risk Arbitrage
◦ 4,03%

Convertible Arbitrage
◦ 6,68%

M&A arbitrage:
◦ 10,64%
16
Macro Funds


Highest average return of all hedge funds
10,42%
17
Events



Distrissed debt
Return:
9,44%
18
Long only


"Only buy something that you'd be perfectly
happy to hold if the market shut down for 10
years." Warren Buffet
berkshire hathaway (buffet): 22% compound
yearly in 40 years

S&P 500: 10% ( 1928-2014)

AEX: 7% last thirty years, 10.7% if reinvested
19
Short only



Return
-5,18%
Risk of unlimited downside
20
Activist Trading
21