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2012/2013  KAN-OECON_OE36  Hedge Fund Strategies

English Title
Hedge Fund Strategies

Course information
Language English
Exam ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Course period Autumn
Changes in course schedule may occur
Monday 09.50-12.35, week 36-41, 43-48
Time Table Please see course schedule at e-Campus
Max. participants 60
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Lasse Heje Pedersen - Department of Finance
lhp.fi@cbs.dk
Secretary: Rikke Glahn - rg.eco@cbs.dk
Main Category of the Course
  • Finance
Last updated on 24-04-2012
Learning objectives
The grading of the class is based on the students’ proven ability to understand active investment strategies and analyze them using rigorous quantitative methods. This includes, among other things,
  • Computing performance measures and critically evaluate the output.
  • Simulating backtests of investment strategies.
  • Understanding liquidity and transaction costs, and deriving the net returns in a backtest.
  • Understanding margin requirements, computing an investment strategy’s capital use, including knowledge of when it would receive a margin call.
  • Applying regression analysis, including in return forecasting.
  • Understanding biases, including being able to avoid such pitfalls as look-ahead bias, selection bias, and survivorship bias.
  • Understanding each of the trading strategies covered in class, including an ability to analyze them conceptually/mathematically and apply them in specific examples. (This is an important part of the class.)
  • Understanding why strategies might work, and why they might not.
  • Knowledge of the historical events connected to hedge funds and markets covered in class.
  • Working independently on projects involving mathematical analysis and data analysis
  • Generalizing arguments, methods, and concepts to problems that have not been analyzed explicitly throughout the course.
Prerequisite
Please note that this course is taught at an elite level. More specifically, students are required to have taken Portfolio Theory (FIR) or Financial Markets and Instruments (FSM) or Capital Market Theory (AEF) or Asset Pricing (cand.oecon.) or Corporate Finance and Incentives or Asset Pricing Theory (cand.polit.). Graduate students in MØK and cand.scient.oecon. must have completed at least their bachelor courses in finance.
Examination
3-hour written
3-hour written:
Type of test Written Exam
Marking scale 7-step scale
Second examiner No second examiner
Exam period December/January, Provisional: The exam is held in December. The re-take is held in January.
Aids Closed Book
Duration 3 Hours

Examination
The exam is a Closed-Book Written Exam, although students may bring a calculator fulfilling CBS's "Rules for Using Electronic Aids During Written Examinations".
Course content
The class describes some of the main strategies used by hedge funds and proprietary traders and provides a methodology to analyze them. In class and through exercises, the strategies are illustrated using real data and students learn to use “backtesting” to evaluate a strategy. The class also covers institutional issues related to liquidity, margin requirements, risk management, and performance measurement.
 
The class discusses the main strategies used by hedge funds in individual equity markets (equity long-short, equity market neutral, dedicated short bias), in tactical asset allocation of equity indices, currencies, fixed-income, and commodities (global macro, managed futures, emerging markets), and in relative-value arbitrage strategies (event driven investments, convertible bond arbitrage, fixed income arbitrage).
 
To analyze these active investment strategies, the class applies tools for performance measurement, backtesting, regression analysis, managing transaction costs, market liquidity risk, funding a strategy, margin requirements, risk management, drawdown control, and portfolio optimization. Also, the class discusses the economics underlying these strategies, why certain strategies might work and why others might not.

The class is highly quantitative. As a result of the advanced techniques used in state-of-the-art investments, the class requires the students to work independently, analyze and manipulate real data, and use mathematical modeling.   
Teaching methods
The course is based on lectures, including class discussion and problem solving. Students are expected to be prepared for class (including reading material and solving problem sets) and to participate actively in the discussion and problem solving.

The course has 36 class hours.
Expected literature
The course aims at teaching the most recent hedge fund strategies from a rigorous academic perspective. Given that there is no book that covers well all of the topics of the class, the course is based on a set of lecture notes as well as a number of research papers. While the list of research papers is subject to change as new strategies are developed and new literature becomes available, the below gives an overview of some of the relevant papers.
 
Introduction to hedge funds
  1. Fung and Hsieh (1999), “A primer on hedge funds,”Journal of Empirical Finance, vol. 6, pp. 309-331.
  2. Malkiel and Saha (2005), “Hedge Funds: Risk and Return,” Financial Analysts Journal, vol. 61, no. 6, 80-88.

Methodology
 

  1. Acharya, and Pedersen (2005), “Asset Pricing with Liquidity Risk,”Journal of Financial Economics, vol. 77, pp. 375-410. Focus on 375-378, and 378-384.
  2. Asness, Krail, and Liew (2001), “Do Hedge Funds Hedge?,”Journal of Portfolio Management, vol. 28, no. 1, pp 6-19.
  3. Black and Litterman (1992), “Global Portfolio Optimization,”Financial Analysts Journal, September/October.
  4. Brunnermeier and Pedersen (2007), “Market Liquidity and Funding Liquidity,”The Review of Financial Studies, 22, 2201-2238.
  5. Garleanuand Pedersen (2009), “Margin-Based Asset Pricing and Deviations from the Law of One Price.”
  6. Garleanuand Pedersen (2008), “Dynamic Trading with Predictable Returns and Transaction Costs.”
  7. Perold (1988), “The Implementation Shortfall: Paper Versus Reality,” Journal of Portfolio Management, Spring 1988, vol. 14, no. 3.
  8. Shleifer and Vishny (1997), “The Limits of Arbitrage,”The Journal of Finance, vol. 52, no. 1, pp. 35-55. 

 
Equity strategies
 

  1. De Bondt and Thaler (1985), “Does the Stock Market Overreact?,”vol. 49, no. 3, pp. 793-805. Read only pages 793-800.
  2. Jegadeesh and Titman (1993), “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,”The Journal of Finance, vol. 48, no.1, pp.65-91. Read only pages 65-70.
  3. Asness, Friedman, Krail, and Liew (2000), “Style Timing: Value versus Growth,”Journal of Portfolio Management, vol. 26, no. 3, pp 50-60.
  4. Lamont (2004), “Going Down Fighting: Short Sellers vs. Firms”, Yale working paper.

 
Macro strategies
 

  1. Soros (2010), “Financial Markets,”Lecture 2 of The Soros Lectures at the Central European University.
  2. Hurst, Ooi, and Pedersen (2010), “Understanding Managed Futures.”
  3. Asness, Moskowitz, and Pedersen (2008), “Value and Momentum Everywhere”

 
Arbitrage strategies
 

  1. Mitchell and Pulvino (2001), “Characteristics of Risk and Return in Risk Arbitrage,”The Journal of Finance, vol. 56; no. 6, pp. 2135-2176.
  2. Asness, Berger, and Palazzolo (2009), “The Limits of Convertible Bond Arbitrage: Evidence from the Recent Crash”
  3. Duarte, Longstaff, and Yu (2005), “Risk and Return in Fixed Income Arbitrage: Nickels in Front of a Steamroller?”  Review of Financial Studies,  20, 769-811.
  4. Mitchell, Pedersen, and Pulvino (2007), “Slow Moving Capital,”The American Economic Review, 97, 215-220.
  5. Mitchell, Pulvino, and Stafford (2002), “Limited Arbitrage in Equity Markets,”The Journal of Finance, vol. 57, pp. 551-584.
Last updated on 24-04-2012