Hedge Fund Strategies

Fixed income long short

Index:

1. Definition2. Strategies2.1. Mortgage backed security arbitrage2.2. Corporate bond arbitrage2.3. Convertible bond arbitrage

Fixed income long short

Fixed income long short: Evolves the investment strategies on private and public debt instruments with:

Fixed maturities and rates Their derivatives

(Donald & Lacey, 2003)

1. Definition

According Howell (2003):

There are many forms of fixed interest arbitrage opportunities - mortgage backed security arbitrage; government bond yield curve arbitrage; corporate bond arbitrage and convertible bond arbitrage.

1. Definition

MBS: developed by financial institutions, are pools of mortgage-backed debt.

A common trade is to short a government bond and take a long position on a mortgage-backed security of similar maturity. While hedging the risk from interest rate surprises, the trader will receive a payoff from the yield differential.

(Connor & Lasarte,n.d.)

2.1. Mortgage backed security arbitrage

The capital structure of a company can be decomposed into equity, senior debt and subordinated debt;

The hedge fund manager want to take advantage of perceived misprising in the capital structure

(Howell, 2003)

2.2. Corporate bond arbitrage

Profits from differences between convertible bonds a company issues and the prices of the common stock.

(Donald & Lacey, 2003)

2.3. Convertible bond arbitrage

Connor, G. and Lasarte, T., n.d., ‘An Overview of Hedge Fund Strategies’, International Asset Management;

Donald,E. and Lacey, Jr., 2003, ‘Democratizing the hedge fund: Considering the Advent of Retail Hedge Funds’, Third Year Paper, Harvard Law School;

Howell, 2003, ‘Fixed Income Hedge Fund Strategies’, in Eureka Hedge, viewed 3 August 2013, from http://www.eurekahedge.com/news/03aug_archive_fixed_income.asp

References