Handbook of Hedge Funds

17

A Smorgasbord of Other Strategies

It is tough to make predictions, especially about the future.

The search for new profitable investment avenues seems inexorable in the hedge fund kingdom. New players typically populate existing strategies, who progressively become victims of their own success – their returns decline and the associated arbitrage opportunities shrink. Talented hedge fund managers must therefore constantly search for new investment opportunities and devise new strategies to exploit them, while simultaneously trying to anticipate and exit from crowded trades. Not surprisingly, these new hedge fund strategies closely parallel the development of financial markets and the availability of new financial instruments. In this chapter, we will simply illustrate and briefly discuss a few of these new strategies.

17.1 CAPITAL STRUCTURE ARBITRAGE AND CREDIT STRATEGIES

Capital structure arbitrage is a relative value strategy that has become popular within hedge funds over the recent years. Its goal is to invest long and short in different parts of the capital structure of the same firm in order to take advantage of pricing inefficiencies between related instruments which are traded simultaneously but on non-integrated markets.

Today, the liabilities of most companies consist of several types of securities (e.g. bank debt, senior bonds, subordinated bonds, preferred stock, common stock, convertible bonds, etc.), which investment banks then use as underlying assets for ...