A hedge fund has compiled a list of French firms that it believes will outperform the overall French stock market by 7 percent over the year. It also has compiled a list of French firms that it believes will underperform the overall French stock market by 7 percent. The hedge fund wants to invest in a market-neutral long/short strategy on the French stock market. It has a capital of €25 million for this purpose. However, it would like to retain a cash cushion of €1 million for unforeseen events. The hedge fund can borrow shares from a primary broker with a cash margin deposit equal to 20 percent of the value of the shares. No additional costs are charged to borrow the shares.
Required:
Outline the appropriate strategy for the hedge fund.
- Had to list 5 steps for the chosen strategy ; include a formula on how to compute the following
- The strategy had to counter the over value and under value of the French stock.
- Need to be based on Harvard Referencing; if possible 2 resources to be used here.
- What is the leverage can the hedge fund take on?