Cover image for Market neutral investing : long/short hedge fund strategies
Market neutral investing : long/short hedge fund strategies
Nicholas, Joseph G., 1959-
Personal Author:
First edition.
Publication Information:
Princeton : Bloomberg Press, [2000]

Physical Description:
xx, 265 pages : illustrations ; 24 cm.
General Note:
Includes index.
Format :


Call Number
Material Type
Home Location
Item Holds
HG4930 .N535 2000 Adult Non-Fiction Central Closed Stacks

On Order



In today's volatile markets, managing risk is more important than ever. Investors are looking for downside protection while maintaining good returns--and market-neutral investing has become one of the hottest methods to meet that need. In this book, industry expert Joseph G. Nicholas explores new approaches to return enhancement and risk reduction through market-neutral strategies.

Market-neutral investments are attractive because they have produced substantially better risk-adjusted returns than the market during the past ten years. The complexities created by the combination of longs, shorts, and leverage, however, make market-neutral strategies very different from conventional investments. Getting to know how these strategies work involves breaking them down into their basic components and then examining how those parts interact as a system with specific behavior characteristics. This book examines eight key strategies, revealing the source of their past returns and giving the investor tools with which to measure the possibility of repeat performance.
Nicholas draws extensively on his company's database of over three thousand hedge funds and from the daily portfolio analysis conducted for hedge fund portfolios. He has also incorporated extensive input and actual investment examples provided by managers and practitioners of each of the strategies discussed in the book.

This is the one book that looks at market-neutral strategies head-on, assessing those that have worked and some notable ones that have failed--and explaining why. Clear, insightful, and illustrated with numerous charts and graphs, Market-Neutral Investing is an invaluable guide for professional investors.

Author Notes

Joseph G. Nicholas, JD is founder and chairman of HFR Group, LLC, which includes HFR Asset Management, LLC, a fund-of-funds management company and Hedge Fund Research, Inc., a leading supplier of hedge fund data. Author of Investing in Hedge Funds and Hedge Fund of Funds Investing, he is a frequent lecturer and media expert on topics relating to alternative investments.

Table of Contents

Acknowledgmentsp. xvii
Forewordp. xix
Introductionp. 1
1 Investing in Relationshipsp. 5
What Is Market Neutral?p. 5
Basic Conceptsp. 10
Relationship Investingp. 12
Understanding Market-Neutral Approachesp. 13
2 Developments in the Hedge Fund Industryp. 19
Hedge Fund Industry Assetsp. 20
Hedge Fund Investorsp. 22
Hedge Fund Strategiesp. 24
3 Making an Investment in Market-Neutral Strategiesp. 27
Linear Analysis of Returnsp. 28
Reducing Exposure to Riskp. 35
Market-Neutral and Hedged Strategiesp. 40
Convertible Arbitragep. 40
Fixed-Income Arbitragep. 42
Mortgage-Backed Securities Arbitragep. 43
Merger Arbitragep. 45
Equity Hedgep. 46
Equity Market-Neutral and Statistical Arbitragep. 48
Relative Value Arbitragep. 51
Achieving Superior Risk-Adjusted Returnsp. 52
Assessing the Risksp. 52
Transparencyp. 54
Focusing on the Underlying Strategiesp. 55
4 Convertible Arbitragep. 57
Convertible Bond Valuationp. 58
Statistical Advantagep. 58
Convertible Valuation Componentsp. 59
Convertible Arbitrage Approachesp. 66
Quantitative Screensp. 66
Kinds of Hedgesp. 66
Setting Up a Market-Neutral Hedgep. 67
Setting up a Bullish Hedgep. 71
Setting up a Bearish Hedgep. 72
Risks and Risk Controlp. 73
Fundamental Analysisp. 73
Hedge Analysisp. 75
Portfolio Constructionp. 76
Liquidityp. 78
Leveragep. 78
Source of Returnp. 79
Convertible Bond Market Historyp. 80
Recent Growth and Developments in Convertible Arbitragep. 82
Performance in Adverse Market Conditionsp. 82
Historical Examplesp. 84
5 Fixed-Income Arbitragep. 89
Fixed-Income Arbitrage Approachesp. 91
Basis Tradesp. 91
Asset Swapsp. 93
TED Spreadsp. 93
Yield Curve Arbitragep. 96
Relative Value Tradesp. 100
Risks and Risk Controlp. 101
Risksp. 101
Measuring and Controlling Interest Rate Riskp. 105
Sources of Returnp. 107
Financingp. 108
Repurchase Agreementsp. 108
Technologyp. 108
Liquidityp. 109
Eventsp. 109
Manager Skill and Hard Workp. 110
Growth and Recent Developments in Fixed-Income Arbitragep. 110
6 Mortgage-Backed Securities Arbitragep. 119
Mortgage-Backed Structures or Sectors (Types of MBS Instruments)p. 121
Mortgage-Backed Securities' Evolutionp. 121
Pass-Throughsp. 124
Basic Collateralized Mortgage Obligations (CMOs)p. 125
CMO Tranchesp. 128
Valuation Methodsp. 132
Option-Adjusted Spreadsp. 132
Information Systemsp. 133
Risks and Risk Controlp. 133
Durationp. 134
Effective and Partial Durationp. 135
Parallel and Rotational Shifts of the Yield Curvep. 136
Convexityp. 136
Prepayment Durationp. 136
Leveragep. 136
Pricingp. 137
Source of Returnp. 137
Valuation Modelsp. 138
Leveragep. 138
Liquidityp. 139
Financingp. 139
Hedging Techniquesp. 139
Recent Developments in MBS Arbitragep. 140
7 Merger Arbitragep. 145
Merger Arbitrage Approachesp. 148
Cash Mergers or Tender Offersp. 148
Stock Swap Mergersp. 148
Stock Swap Mergers with a Collarp. 151
Multiple Bidder Situationsp. 157
Leveraged Buyouts and Hostile Takeoversp. 162
Risksp. 166
Event Riskp. 166
Deal Flowp. 168
Liquidityp. 168
Risk Controlp. 169
Diversificationp. 169
Leveragep. 169
Source of Returnp. 169
Growth and Recent Developments in Merger Arbitragep. 170
Deal Flow and Other Factors Affecting Volumep. 171
Stress Period: The Third Quarter of 1998p. 173
Returnsp. 176
8 Equity Hedgep. 177
Investment Themes and Fundamental Analysisp. 178
Investment Themesp. 179
Fundamental Analysisp. 180
Equity Hedge Approachesp. 181
Quantitative vs. Qualitative Mixp. 181
Universe of Stocksp. 182
Stylep. 182
Liquidityp. 188
Net Market Exposurep. 189
Researchp. 190
Leveragep. 191
Risks and Risk Controlp. 192
Stock-Picking Riskp. 192
Market Riskp. 193
Universe of Stocksp. 193
Diversificationp. 194
Sell Disciplinesp. 195
Leveragep. 195
Source of Returnp. 196
Recent Growth and Developments in Equity Hedge Investingp. 197
9 Equity Market-Neutral and Statistical Arbitragep. 203
Equity Market-Neutral Approachesp. 205
Initial Screen: Universe of Investable Stocksp. 205
Stock Selectionp. 208
Mean Reversion-Based Approachesp. 213
Risks and Risk Controlp. 217
Portfolio Construction and Optimizationp. 217
Manager Styles--Putting It All Togetherp. 221
Source of Returnp. 222
Recent Growth and Developments in Equity Market-Neutral Investingp. 223
10 Relative Value Arbitragep. 231
Relative Value Arbitrage Approachesp. 232
Convertible Arbitragep. 233
Merger Arbitragep. 234
Equity Statistical Arbitragep. 236
Pairs Tradingp. 237
Fixed-Income Arbitragep. 237
Options and Warrants Tradingp. 239
Capital Structure Arbitragep. 240
Regulation D (Structured Discount Convertible) Arbitragep. 241
Risks and Risk Controlp. 241
Strategy Mixp. 242
Strategy Weightingsp. 242
Source of Returnp. 243
Growth and Recent Developments in Relative Value Arbitragep. 243
Afterwordp. 247
Glossaryp. 249
Indexp. 255