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Alternative Beta Strategies and Hedge Fund Replication by Lars Jaeger

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3

The Individual Hedge Fund Strategies' Characteristics

This chapter elaborates in more detail the underlying characteristics of each strategy and thus serves as the basis for the discussion of replication in later chapters. In Figure 2.2, I presented a classification of the different hedge fund strategies discussed in this book. Different classifications are possible along the lines of the directional exposures of the various hedge fund strategies to equity and bond markets: ‘directional long biased’: net long equity markets; ‘arbitrage strategies’: no directional bias to equity markets but providing insurance against a large market turmoil; ‘tactical trading’: variable bias to equity markets. I will stick to the more broadly used classification given in Figure 2.2 and discuss the degree of directional exposure within the discussion of the individual hedge fund strategies.

The reader might find it not particularly difficult to comprehend the basic principles of each strategy. This reflects the fact that hedge fund strategies can be quite straightforward in principle and share similar general exposure profiles. Despite the apparent clarity of the strategies' principles, the implementation of a particular trading approach can be quite complex and difficult, however. Often execution of a particular strategy requires a unique skill-set and edge on the part of the manager. It is the experience and creativity of the single hedge fund manager in dealing with the complexity of the traded ...

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