Harold Yoon looked up from his workstation at the analysis that he had just printed out. Yoon had come in to work at 4A.M. in the morning today, July 27, 2000, to look over this analysis one more time. As the managing partner for a $32 million equity hedge fund, Yoon was used to coming in early to the partnership's downtown San Francisco office, but this time he had more than the usual monitoring of pre-market news to take care of.
Immediately after the markets closed today, 1P.M. in San Francisco, he and the other partners of the hedge fund would meet to discuss a potential change of hedging strategy. The fund they managed tended to be a market-neutral fund, meaning that the fund hedged out all market risk. In the past, they had hedged this market risk by short-selling, or “shorting,” shares of a market index. However, due to the unprecedented volatility (and valuation levels) seen in the markets over the past several months, the partners were now considering hedging this risk by purchasing put options on this market index rather than simply shorting.
Yoon picked up the analysis that an analyst employed by the fund had carried out. Prior to the partners' meeting this afternoon, he needed to have a recommendation ready as to which hedging strategy to pursue.
From 1988 to 1998, the number of hedge funds around the globe increased by almost 425%, reaching an estimated 5,830 funds with assets under management. Assets under management during this ...