According to Greenwich Alternative Investments, there are 18 hedge fund strategies which fund managers and investors rely on. They are diversified into 4 main groups namely: Market Neutral Group (including , Event-Driven and Arbitrage); (including , Opportunistic, Short Selling and Value); D (including ); (including , Fixed Income and Multi-Strategy).
The strategy which is considered firstly is Opportunistic. According to Greenwich Alternative Investments, Opportunistic is defined as a strategy in which the manager’s investment method changes over time and does not consistently select securities according to the same strategy to better take advantage of current market conditions and investment opportunities. With Opportunistic, characteristics of the portfolio, such as asset classes, market capitalization, etc seem to vary dramatically from time to time. The manager may also apply an incorporation of different methods at a given time.
Regarding to the second strategy namely Macro, it is a directional trading approach in which the manager establishes the portfolio based on a top-down view of worldwide economic trends, considering some factors such as inflation, interest rates, economic policies, etc. With Macro, the manager tries to make profit from changes in the value of entire asset classes rather than considering the fare of individual corporate securities. For example, the manager may hold short positions in U.S. treasury bills and the Euro while holding long positions in the Euro and U.S. treasury bills.
Chart 1: The returns of Opportunistic (OPP) and Macro (MAC) strategy from 2001 to 2011
Source: Greenwich Alternatives Investments
The paper will make a comparison of two strategies of the Greenwich Strategy Group Indices (which are the Opportunistic and Macro) and the FTSE 100 Index and the S&P 500 TR Index by analysing the total return and the standard deviation. Firstly, there is an explanation about the deference of the total return in some periods.
Chart 2: The total return of the Opportunistic, FTSE 100 Index, S&P 500 TR Index
Source: Greenwich Alternatives Investments
The graphs of total return each show a very different pattern of April and March 2012, YTD (year to date), 3 moths and 1 year of the Opportunistic, the FTSE 100 Index and the S&P 500 TR Index. The total return of the Opportunistic and FTSE 100 Index fluctuated considerably while the total return of the S&P 500 TR Index did not change a lot. On March and April 2012, the total return of the Opportunistic had stability at -0.5% while the rate of the S&P 500 TR Index and FTSE 100 Index were -0.6% and -0.5% on April 2012. However, the March 2012 return of the S&P 500 TR Index got 3.3% and the FTSE 100 Index had -1.8%. In particularly, all of them had the total return which reached a peak at YTD (year to date). The chart demonstrated the YTD return of the S&P 500 TR Index was the highest cause its value was 11.9% greater than the YTD return of the Opportunistic (4.9%). Nonetheless, the rate of FTSE 100 Index was smaller than the Opportunistic as it was 3%. Moreover, the 3 month return of the S&P 500 TR Index got the biggest value continuously when it was 7.1%. Over the same period, the rate of Opportunistic was 1.5% higher compared to the 3 month return of the FTSE 100 Index. The chart also shows the 1 year return of the S&P 500 TR Index was 4.8% much higher than the Opportunistic. Beside that, the 1 year return of the Opportunistic was also less than the FTSE 100 Index (-5.5%).
In order to choose the best way for the investors, it is necessary to analyse the risk of the Opportunistic, the S&P 500 TR Index and the FTSE 100 Index. The below chart 3 expresses the standard deviation of 3 and 5 year annualised of the Opportunistic, the FTSE 100 Index and the S&P 500 TR Index. Standard deviation is the rate which is used to examine the volatility of the historical returns hence it helps the investors identify what stocks, trade options or bonds have a small fluctuation. It is very important because the investment has strong movement (for example, bonds or stocks have high standard deviation) which has more risk than the steady investment (bonds or stocks have low standard deviation).
According to chart 3, the standard deviation of the Opportunistic is the lowest. More specifically, the 3 year annualised standard deviation of the Opportunistic is 8.1% much smaller than the S&P 500 TR Index with 15.6% and the FTSE 100 Index with 14.7%. Moreover, the 5 year annualised standard deviation of the Opportunistic is 8.8% while the rate of the S&P 500 TR Index is the highest with 19%. Over the same period, the standard deviation of the FTSE 100 Index is 17% bigger compared to the rate of the Opportunistic. As a result, the investors can get the lowest risk if they invest by the Opportunistic strategy.
Chart 3: The Standard deviation of 3 and 5 year annualised of the Opportunistic, FTSE 100 Index, S&P 500 TR Index.
Source: Greenwich Alternatives Investments
Overall, the total return of the S&P 500 TR Index may be greater than the Opportunistic but the risk of the index is much higher than the Opportunistic. Furthermore, the April 2012 return of the Opportunistic was greater than the S&P 500 TR Index, so the Opportunistic is the best method for investors.
Secondly, the following part will examine and make a comparison of the total return and the risk between the Macro strategy, the S&P 500 TR Index and the FTSE 100 Index.
The chart 4 shows the deference of the total return of April and March 2012, YTD, 3 month and 1 year between the Macro, the FTSE 100 Index and the S&P 500 TR Index.
Chart 4: The total return of the Macro, FTSE 100 Index, S&P 500 TR Index
Source: Greenwich Alternatives Investments
According to the chart, the April 2012 return of the Macro was 0.8% greater than both the indexes. Furthermore, the March 2012 return of the S&P 500 TR Index was the highest with 3.3% compared to -0.7% of the Macro but the total of the FTSE 100 Index was the smallest at -1.8%. If almost of types return of the Macro were bigger than the FTSE 100 Index, there was a change with the YTD return. In addition, the YTD of the Macro was 2.6% while the rate of FTSE 100 Index got 3% and the highest YTD return was belong to the S&P 500 TR Index with 11.9%. The 3 month return of the Macro was 1.3% less than the amount of S&P 500 TR Index with 7.1% but it was taller than the FTSE 100 Index (1%). The 1 year return of the Macro was lower than the S&P 500 TR Index again when it was 0.7% compared to 4.8%. However, there was a huge decrease of the FTSE 100 Index over the same period as it got only -5.5%.
In order to have an overview of the risk of the Macro, the FTSE 100 Index and the S&P 500 TR Index, the chart 5 illustrates the standard deviation of 3 and 5 year annualised. The rate of the Macro is the smallest compared to both the indexes. In addition, the 3 year annualised standard deviation of the S&P 500 TR Index and FTSE 100 Index are 15.6% and 14.7% much bigger than the Macro with only 3.8%. Moreover, the 5 year annualised standard deviation of the Macro is 4.8% while the rate of the S&P 500 TR Index and FTSE 100 Index are 19% and 17% over the same period. Therefore, the investors can reduce the risk with the Macro strategy.
Chart 5: The Standard deviation of 3 and 5 year annualised of the Macro, FTSE 100 Index, S&P 500 TR Index
Source: Greenwich Alternatives Investments
Overall, almost historic return of the S&P 500 TR Index were greater than the Macro but the investors could choose the Macro strategy in the future to invest because the April 2012 return of the Macro increased clearly and the risk of the Macro is lower.
All hedge fund strategies have different advantages but they allow investors developed their portfolio variegation profits. The strategy weights show the average of each hedge fund strategy in the portfolio. The percentage of the Macro strategy on March 2012 is 8.2% (takes around 31.17% in the growth of the Directional Trading Group) when the development of the Opportunistic is 8.5% on the same period (occupies approximately 21.63% in the percentage of the Long-Short Equity Group). However, the investors have to face some risks with strategies. For example, some macro problems can produce risk for the Macro. More specifically, the changes in global economies will impact to the governments policies; therefore, the interest rate will have modification. As a result, it affects all majors in the market, such as, bonds, equities. The movement increase the risk of the Macro. Furthermore, the IPOs events, hostile bids and other event-driven opportunities can impact to the Opportunistic because the events make an interim earnings disappointment. Hence, the investors can lose their trust and the Opportunistic have a lot of risk suddenly.
- CONCLUSION
In conclusion, there are many methods that investors can develop their portfolio, such as, the hedge funds strategies, some indexes but it is not easy to choose the best investment way. In order to make decision, the investors need to make a comparison of the historic returns and the risk of all methods. It can help them predict the trend of markets, minimize the risk and look for the best opportunity. In the paper, the historic returns of the two hedge fund strategies are not really greater than the S&P 500 TR Index and FTSE 100 Index but their risks are much lower than both the indexes. Therefore, in my opinion, the investors should use the hedge fund strategies because they can decrease risk more strongly than the indexes.
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TheCityUK, 2010, ‘Hedge Funds’, Financial Markets Series, UK
Alternative Investment Management Association, 2010, Hedge Fund Booklet, Australia
Caldwell, T., 1995, Introduction: The model for superior performance, in: J. Lederman, R.A. Klein. Eds. , Hedge Funds. Irwin Professional Publishing, New York, pp. 1–17
Greenwich Alternative Investments, 2012, Hedge Fund Strategy Definition
Greenwich Alternative Investments, 2012, Hedge fund strategy performance, , viewed date May 12th 2012
Greenwich Alternative Investments, 2012, Hedge Fund Indices, , viewed date May 12th 2012
Greenwich Alternative Investments, 2012, Hedge Fund Indices, , viewed date May 12th 2012
Greenwich Alternative Investments, 2012, Hedge Fund Indices, , viewed date May 12th 2012
Greenwich Alternative Investments, 2012, Hedge Fund Indices, , viewed date May 12th 2012