Assignment - Hedge Funds Investment Strategy
This exercise is a case analysis aiming at practising generation, replication and performance evaluation of portfolios; and build up analytical skills. Like mutual funds, hedge fund industry also experienced significant expansion over the past 20 years and the hedge fund industry becomes more mature and competitive. In this assignment, you are given a case of AQR hedge fund, who is trying to promote their DELTA strategy. The case will be distributed in hard copy during lecture time. And Data for the assignment will be posted in lms. Based on the case scenario, students are required to do some research and answer questions given below:
Assignment Questions:
1. Is DELTA delivering beta or alpha? How and why DELTA was developed?
2. How might the DELTA product cannibalize AQR's existing business?
3. Although many investors were attracted investors, many still found hedge funds themselves to be unappealing. Why?
4. In response to the criticisms in Q3, alternative products were soon introduced into the marketplace. What are they? Do some research and briefly illustrates the features of these alternative investment products.
5. Using the data in Exhibit 1 of the case, regress HFRI on each index. Use the coefficients to forecast the return for each month in 2003. Repeat this regression using data for 1997- 2003 and forecasting HFRI return for 2004. Repeat through 2011.
a. What is average monthly return and volatility of HFRI? How does it compare to properties of predicted returns to the properties (E.G., Sharpe ratio) of S&P?
b. How well do predicted returns correlate with HFRI?
c. Repeat monthly and/or using a smaller window. Is there any improvement?
d. How much fees could HFRI replication charge before falling below S&P Sharpe?
6. How has DELTA done vs. HFRI and HFRX? Compute the mean return, volatility, Sharpe ratio, and correlations of DELTA with the indices, for the whole period as well as two sub- periods (2008-2009 and 2009-2011).
The data for HFR index and other resources for the hedge fund industry can be downloaded from:
https://www.hedgefundresearch.com/
The data for the CAPM and APT can be downloaded from the data library provided by Prof French:
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
Attachment:- Assignment Case&Data.rar