Lesson 9 of 9 · All lessons in this module
- What makes a hedge fund different
- Strategy families and equity hedge strategiesVideo lesson
- Event-driven strategies
- Relative value and opportunistic strategies
- Investing directly: partnerships, master-feeders, side letters and SMAsVideo lesson
- Investing indirectly: funds of funds and replication ETFs
- Where hedge fund returns come from, and why indexes flatter them
- Risk, return and diversification in a portfolio
- Integrated case: classify, size and cost a multi-strategy book
Lesson 9 of 9 · 16 min
Integrated case: classify, size and cost a multi-strategy book
A multi-strategy fund's book mixes trades from every family; the case skill is to classify each trade by what it bets on, then apply the right sizing arithmetic to it and check what the investor keeps after fees.
In short
- Classify by the source of the edge, not by the fact that two prices are compared: a valuation-based pair of stocks is equity long/short, not relative value.
- Relative value in this taxonomy means convertible arbitrage, fixed-income trades and multi-strategy; event driven needs a dated corporate event; opportunistic is top-down or trend-based.
- Equity book: gross = (L + S) ÷ capital, net = (L − S) ÷ capital, and beta-adjusted exposure decides whether the book is really market neutral.
- Merger arbitrage: short the acquirer in the exchange ratio, then compare the small gain if the deal closes with the large loss if it breaks.
- Convertible arbitrage: short shares = bonds × shares per bond × delta; the issuer's default risk stays.
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