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Alternative Investment Strategies

In my earlier blog on UCITS III, to some extend, UCITS III 'accredited' mutual funds operate very similar to hedge funds whereby there are many different alternative investment strategies that managers can use to extract returns from the market.  The main different between UCITS and hedge funds are that UCITS cannot leverage and short selling on physical securities.

Thus, UCITS could be seen as an alternative investment. The alternative investment strategies that could be deploy may be classified into the following categories:

  1. Global Macro – capitalise on changes in the global economic environment, such as economic imbalances, dislocations and uncertainty, to seek out opportunities by using a multi-asset class approach and investing across fixed income, equities, currencies, commodities and others, dependent on market condition.
  2. Event Driven – dependent on a particular event being the catalyst and includes merger arbitrage, distressed, liquidations, and spin-offs, as well as value driven special situation equity investing.
  3. Market Neutral – typically long an short equity positions with approximately zero net dollar exposure. Some funds will attempt to be beta, sector, and market cap neutral to further reduce equity market risk.
  4. Fixed income arbitrage – trading inefficiencies in the pricing of bonds, by employing a variety of strategies, including relative value based trades to directional bets on interest rate shifts.
  5. Statistical arbitrage – trading pricing inefficiencies identified by mathematical models.
Deutsch: Myron Scholes

Deutsch: Myron Scholes (Photo credit: Wikipedia)

The infamous US hedge fund manager Long-Term Capital Managment (LTCM), founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers, used trading strategies such as fixed income arbitrage, statistical arbitrage and pairs trading. Initially the fund was enormously successful with annualised returns of over 40% (after fees) in its first few years. However, in 1998, it lost $4.6 billion in less than four months following the Russian financial crisis. The fund was closed in early 2000. The fund is well-known as Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences were the board of director members.