Background Information for Hedge Fund Interviews
Oct 31, 2008 in Hedge Funds
If you are looking for a guide to the nuts and bolts of hedge funds, see the Vault Guide to Hedge Funds
It will guide you through what a hedge fund is, what the difference between a hedge fund and a mutual fund is, various hedge fund strategies and so forth.
Hedge Fund Portfolio Strategies A whitepaper on hedge fund basics from the CBOE.
Hedge Fund Glory Days Fading Fast (NY Times, Sept 11, 2008)
“Making millions — or even a few billion — by managing a hedge fund has been a running dream on Wall Street in recent years. But suddenly even the masters of this $2 trillion universe are falling on hard times, at least by their own gilded standards.”
New York Magazine (April 9, 2007) “Isn’t it time you stopped pretending to understand what a hedge fund is? We tell you all you need to know, in plain English”
While hedge funds are notoriously secretive regarding the strategies they employ, due to some recent bad bets that threaten to bankrupt well-established funds, certain strategies have been publicized by the media. Two recent examples include Citadel Investments (convertible bond arbitrage) and a host of funds that bet the wrong way on VW shares.
See stories about Citadel:
Citadel Dispels Rumors But Can’t Mask a Bad Year
“Since Mr. Griffin, 40 years old, founded Citadel about 20 years ago, it has been one of the world’s most lucrative places to invest. Its returns, on an annualized basis, have been 18% to 20%. The firm manages about $17 billion now — down from about $20 billion at the beginning of the year.
For 2006 and 2007, its main funds — Kensington and Wellington — returned about 30% annually. Last year, Mr. Griffin wrote in his letter, “was the most successful year in the history of our firm.” Its core strategy has long been convertible-bond arbitrage, which allows investors to profit from differences in the movements of convertible bonds and other securities.
This summer, Citadel increased investments in that area. “Regretfully, I did not foresee the financial disaster that was to unfold in September,” he wrote in the letter.
The financial crisis dramatically raised the cost of borrowing and reduced availability of credit, he wrote, reducing the value of cash assets as compared to the value of derivative instruments. At the same time, the decision of regulators around the world to temporarily ban the short selling of equities “created material dislocations across many of our portfolios and disrupted our ability to assume and manage risk.”
Other hedge fund firms that focus on convertible-bond arbitrage have also been hurt. CQS LLP saw its flagship CQS Convertible and Quantitative Strategies Fund down about 14.5% in September, leaving it down roughly 17% for the year and with about $3.5 billion in assets. The fund has had annualized returns of about 12.3% since inception in 2000.”
Overview of Convertible Bond Arbitrage
Mechanics of Convertible Bond Arbitrage
VW/Porsche: October 2008 disaster in which hedge funds were caught in a short squeeze for the common equity shares of VW, causing the shares to soar hundreds of percentage points in just a few days, ultimately rendering VW the largest company in the world on a market cap basis.
A Painful Pile-Up for Hedge Funds (The Economist)
Hedge funds fear bankruptcy after Porsche squeeze
Time to go Convertible? (Financial Times)
VW’s 348% Two-Day Gain Is Pain for Hedge Funds (Wall Street Journal)
Porsche, VW – and hedge funds