Page 33 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes 3. Emerging Markets: Hedge funders invest in equity or debt of emerging (less mature)
markets, which tend to have higher inflation and volatile growth. Short selling is not
permitted in many emerging markets, and, therefore, effective hedging is often not
available, although bad debt can be partially hedged via Indian Treasury futures and
currency markets. Expected Volatility: Very High.
4. Fund of Funds: Mixes and matches hedge funds and other pooled investment vehicles.
This blending of different strategies and asset classes aims to provide a more stable long-
term investment return than any of the individual funds. The mix of underlying strategies
and funds can control returns, risk and volatility. Capital preservation is generally an
important consideration. Volatility depends on the mix and ratio of strategies employed.
Expected Volatility: Low - Moderate.

5. Income: Invests with primary focus on yield or current income rather than solely on capital
gains. May utilize leverage to buy bonds and sometimes fixed income derivatives in order
to profit from principal appreciation and interest income. Expected Volatility: Low.
6. Macro: Aims to profit from changes in global economies typically brought about by shifts
in government policy, which impact interest rates, in turn affecting currency, stock, and
bond markets. Participates in all major markets equities, bonds, currencies and commodities
- though not always at the same time. Uses leverage and derivatives to accentuate the
impact of market moves. Utilizes hedging, but leveraged directional bets tend to make
the largest impact on performance. Expected Volatility: Very High.

7. Market Neutral - Arbitrage: Attempts to hedge out most market risk by taking offsetting
positions, often in different securities of the same issuer. Investors may also use futures to
hedge out interest rate risk. Focuses on obtaining returns with low or no correlation to
both the equity and bond markets. These relative value strategies include fixed income
arbitrage, mortgage backed securities, capital structure arbitrage, and closed-end fund
arbitrage. Expected Volatility: Low.
8. Market Neutral - Securities Hedging: Invests equally in long and short equity portfolios
generally in the same sectors of the market. Market risk is greatly reduced, but effective
stock analysis and stock picking is essential to obtaining meaningful results. Leverage
may be used to enhance returns. Usually low or no correlation to the market. Sometimes
uses market index futures to hedge out systematic (market) risk. Relative benchmark
index usually T-bills. Expected Volatility: Low.
9. Market Timing: Allocates assets among different asset classes depending on the manager's
view of the economic or market outlook. Portfolio emphasis may swing widely between
asset classes. Unpredictability of market movements and the difficulty of timing entry
and exit from markets add to the volatility of this strategy. Expected Volatility: High.
10. Opportunistic: Investment theme changes from strategy to strategy as opportunities arise
to profit from events such as IPOs, sudden price changes often caused by an interim
earnings disappointment, hostile bids, and other event-driven opportunities. Investors
may utilize several of these investing styles at a given time and is not restricted to any
particular investment approach or asset class. Expected Volatility: Variable.
11. Multi-Strategy: Investment approach is diversified by employing various strategies
simultaneously to realize short and long-term gains. Other strategies may include systems
trading such as trend following and various diversified technical strategies. This style of
investing allows the manager to overweight or underweight different strategies to best
capitalize on current investment opportunities. Expected Volatility: Variable.
12. Short Selling: Sells securities short in anticipation of being able to re-buy them at a future
date at a lower price due to the manager's assessment of the overvaluation of the securities,

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