Capital Structure Arbitrage
Invests in various tranches of debt and equity of the same or related companies in hopes of capturing pricing inefficiencies. Capital structure arbitrageurs typically hold long positions of senior securities, such as debt or preferred stock, hedged with short positions in common stock. The objective is to generate returns through the proceeds of the short sale of stock, interest income from the purchase of debt instruments, and capital gains from price movements of the equity and fixed income securities.
Invests in various tranches of debt and equity of the same or related companies in hopes of capturing pricing inefficiencies. This type of arbitrage involves the simultaneous purchase of a convertible bond and the short sale of the underlying stock. Returns are enhanced through the use of leverage.
Invests in the debt or equity of companies in bankruptcy, reorganization, or are experiencing some other form of financial difficulty. These companies may be experiencing balance sheet problems or have a perceived problem in the capital markets which may raise liquidity concerns. The manager acquires these securities at low valuations in the hope that they will appreciate in value upon the resolution of their financial difficulties.
Invests in markets within countries that have an underdeveloped or developing infrastructure with significant potential for economic growth and increased capital market participation for foreign investors. These countries generally possess some of the following characteristics: per capita GNP less than $9000, recent economic liberalization, debt ratings below investment grade, recent liberalization of the political system and non membership in the Organization of Economic Cooperation and Development.
Equity Market Neutral
Designed to exploit equity market inefficiencies and usually involves being simultaneously long and short equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency neutral or both. Attempts are often made to control industry, sector,and market capitalization exposures.
Seeks to identify and exploit pricing inefficiencies that have been caused by some sort of corporate event such as a merger, spinoff, distressed situation or recapitalization.
Fixed Income Arbitrage
Invests in fixed income securities. The manager will go long debt issues that are perceived to be attractively priced and short debt issues that are perceived to be expensively priced. Debt instruments invested in include US treasury securities, corporate bonds, municipal bonds, mortgage-backed bonds, and sovereign debt of other nations. Fixed income arbitrage is often highly leveraged.
The manager invests primarily in futures, which are financial contracts for the buying and selling of an index or commodity at some future date. Futures contracts to buy act as long positions while futures contracts to sell may hedge a portfolio. Trading futures can entail particularly high levels of leverage.
Invests in equities that are believed to be undervalued and sells short equities that are believed to be overvalued. Some managers limit this strategy to a specific sector such as technology or financial services, while other managers limit this strategy to specific market capitalizations. Managers may either by net long or net short. For example, a manager may have 80% of his capital invested long and 50% invested short for a net long exposure of 30%. The basic belief behind this strategy is that it will enhance the managers stock picking ability and protect investors in all market conditions.
Invests in changes in the global macroeconomic environment through participation in the various capital markets. A top-down methodology allows managers of this strategy to utilize all asset classes (equities, bonds, currencies, derivatives) available in the global capital markets.
The manager attempts to predict the short-term movements of various markets (or market segments) and, based on those predictions, moves capital from one asset class to another in order to capture market gains and avoid market losses. While a variety of asset classes may be used, the most typical ones are mutual funds and money market funds.
Merger (Risk) Arbitrage
Invests in companies that are involved in mergers, acquisitions, spin-offs, restructurings, or some other corporate change that will alter the complexion and future direction of the company. Traditional merger arbitrage investing involves buying (going long) the company being acquired and, in certain situations, selling (going short) the acquiror in an attempt to hedge the position.
Invests in several different types of strategies at any particular time. The manager opportunistically allocates capital among the various strategies in order to create the best risk/reward profile for the overall fund. Common strategies include merger arbitrage, convertible arbitrage, fixed income arbitrage, long/short equities and volatility arbitrage.
The manager maintains a consistent net short exposure in his portfolio, shorting those securities the manager anticipates will decrease in value. In order to short sell, the manager borrows securities from a prime broker and immediately sells them on the market. The manager later repurchases these securities, ideally at a lower price than he sold them for, and returns them to the broker. In this way, the manager is able to profit from a fall in a security's value. Short selling managers typically target those securities they believed to be overvalued. Short selling serves as a hedge for long-only or long-biased portfolios.