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.
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Course prerequisites |
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:
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Examination form |
Written sit-in exam |
Individual or group exam |
Individual |
|
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". |
Assignment type |
Written assignment |
Duration |
3 hours |
Grading scale |
7-step scale |
Examiner(s) |
One internal examiner |
Exam period |
December/January, Provisional: The exam is held
in December. The re-take is held in January. |
Aids allowed to bring to the exam |
Limited aids, see the list below and the exam
plan/guidelines for further information:
- Allowed calculators
- Allowed dictionaries
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Make-up exam/re-exam |
Same examination form as the ordinary exam
If the number of registered candidates for the make-up
examination/re-take examination warrants that it may most
appropriately be held as an oral examination, the programme office
will inform the students that the make-up examination/re-take
examination will be held as an oral examination
instead.
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Course content and
structure |
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
- Fung and Hsieh (1999),
“A primer on hedge funds,”Journal of Empirical Finance, vol. 6,
pp. 309-331.
- Malkiel and Saha (2005),
“Hedge Funds: Risk and Return,” Financial Analysts Journal,
vol. 61, no. 6, 80-88.
Methodology
- 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.
- Asness, Krail, and Liew (2001),
“Do Hedge Funds Hedge?,”Journal of Portfolio Management, vol.
28, no. 1, pp 6-19.
- Black and Litterman (1992),
“Global Portfolio Optimization,”Financial Analysts Journal,
September/October.
- Brunnermeier and Pedersen (2007),
“Market Liquidity and Funding Liquidity,”The Review of
Financial Studies, 22, 2201-2238.
- Garleanuand Pedersen (2009),
“Margin-Based Asset Pricing and Deviations from the Law of One
Price.”
- Garleanuand Pedersen (2008),
“Dynamic Trading with Predictable Returns and Transaction
Costs.”
- Perold (1988),
“The Implementation Shortfall: Paper Versus Reality,” Journal
of Portfolio Management, Spring 1988, vol. 14, no. 3.
- Shleifer and Vishny (1997),
“The Limits of Arbitrage,”The Journal of Finance, vol. 52, no.
1, pp. 35-55.
Equity strategies
- De Bondt and Thaler (1985),
“Does the Stock Market Overreact?,”vol. 49, no. 3, pp. 793-805.
Read only pages 793-800.
- 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.
- Asness, Friedman, Krail, and Liew (2000),
“Style Timing: Value versus Growth,”Journal of Portfolio
Management, vol. 26, no. 3, pp 50-60.
- Lamont (2004),
“Going Down Fighting: Short Sellers vs. Firms”, Yale working
paper.
Macro strategies
- Soros (2010),
“Financial Markets,”Lecture 2 of The Soros Lectures at the
Central European University.
- Hurst, Ooi, and Pedersen (2010), “Understanding Managed
Futures.”
- Asness, Moskowitz, and Pedersen (2008),
“Value and Momentum Everywhere”
Arbitrage strategies
- Mitchell and Pulvino (2001),
“Characteristics of Risk and Return in Risk Arbitrage,”The
Journal of Finance, vol. 56; no. 6, pp. 2135-2176.
- Asness, Berger, and Palazzolo (2009),
“The Limits of Convertible Bond Arbitrage: Evidence from the Recent
Crash”
- 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.
- Mitchell, Pedersen, and Pulvino (2007),
“Slow Moving Capital,”The American Economic Review, 97,
215-220.
- Mitchell, Pulvino, and Stafford (2002),
“Limited Arbitrage in Equity Markets,”The Journal of Finance,
vol. 57, pp. 551-584.
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