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SMM519

Alternative Investments

Term II 2022

Resit Coursework

Question 1

The authors of the paper

Fung, W., & Hsieh, D. A. (2001). The risk in hedge fund strategies: Theory and evidence from trend followers. The review of financial studies, 14(2), 313-341

Found that:

“the relationship between trend followers and the equity market is nonlinear.   Although returns of trend following funds have a low beta against equities on  average, the state dependent beta estimates tend to be positive in up markets and negative in down markets ”

Using the data contained in the spreadsheet DataForCoursework.xlsx investigate whether this is the case for the period 1994-2021. Present your results and          discuss similarities/differences between your results and the original academic    paper.

Question 2

The authors of the paper

Mitchell, M., & Pulvino, T. (2001). Characteristics of risk and return in risk arbitrage. the Journal of Finance, 56(6), 2135-2175.

Found that:

“risk arbitrage returns are positively correlated with market returns in severely      depreciating markets but uncorrelated with market returns in flat and appreciating markets. This suggests that returns to risk arbitrage are similar to those obtained from selling uncovered index put options. ”

Using the data contained in the spreadsheet DataForCoursework.xlsx investigate whether this is the case for the period 1994-2021. Present your results and          discuss similarities/differences between your results and the original academic    paper.

Question 3

The author of the paper

Kat, H. M. (2003). 10 things that investors should know about hedge funds. The Journal of wealth management, 5(4), 72-81.

Sates that

“One has to invest at least 20% in hedge funds for it to make a difference. ”

Consider a hypothetical investor who currently has a portfolio which is 60%         equities (proxied by MSCI World Equity index) and 40% fixed income (proxied by FTSE World Govt Bond index), do you agree or disagree with the author? Does  the choice of hedge fund strategy influence your conclusion? Use the data          contained in the spreadsheet DataForCoursework.xlsx to support your answer.