A two-day intensive workshop offering an in depth structured approach to the analysis of hedge funds and alternative investment strategies. The workshop takes a credit focus for bankers and analysts but is also appropriate for a wider audience who need to understand the key risk issues of the hedge fund industry.
Course Objectives
The workshop offers a structured analytic framework for the credit analysis of hedge and other unregulated funds.
Specifically participants will be equipped to:
- Distinguish the risk profile of a fund’s investment strategy, structure, leverage and liquidity
- Apply financial analytic tools used to benchmark the performance and risk profile of a fund
- Identify the due diligence required for evaluating the fund manager's expertise, investment process, risk management and controls
- Evaluate the structural risks and mitigants of exposures to funds.
Target Audience
The workshop is targeted at an intermediate level for credit analysts but is also appropriate for a wider audience of risk managers, bankers, regulators and other professionals who need to understand the key risk issues of the hedge fund industry. Participants should have a reasonable understanding of investment markets and financial products.
This workshop is complementary to the one day workshop: Regulated Funds & Fund Managers. Participants may also be interested in attending Counterparty Credit Risk in Derivatives.
The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.
Content
INDUSTRY OVERVIEW
Background
- History and growth of hedge funds
- Role of hedge funds in financial markets
- Investors - evolving investor base
Features of unregulated funds:
- Hedge funds, managed accounts, certain closed ended funds, fund of funds, master feeders, private equity etc.
- Legal status - partnerships, corporations, managed accounts etc.
- Fee structures - management and performance; high water marks
- Investor redemption terms-lockups, notice periods, frequency
- Funds of funds and other structured products
- Jurisdiction - offshore registrations, listings, fund manager domicile
Goals
- Absolute versus benchmarked returns
- Alpha versus beta; portable alpha
- Correlations
ANALYTIC OVERVIEW
Structured approach to analysis
- Purpose of transaction and sources of payback - Who is the counterparty? What assets or derivatives are being financed? How will the transaction be settled or the debt repaid at maturity?
- Risk analysis - orientation of fund, strategy, financials and key parties
- Structure - risks and mitigants of the transaction
FUND ANALYSIS
Key parties
- Roles and responsibilities of various parties: manager, advisers, administrator, prime broker, custodian etc
- Prime brokers - impact of relationship on risk profile
Strategies and investment practices
- Techniques to achieve high risk adjusted returns: leverage, derivatives and short selling
- Fund policies, practices and restrictions
- Risk profile of different strategies
- Directional Strategies
- Global macro
- Managed futures
- Dedicated short bias
- Emerging markets
- Relative value strategies
- Convertible arbitrage
- Equity market neutral
- Long/short equity
- Fixed income arbitrage
- Event-driven
- Distressed
- Risk arbitrage
- Multi strategy funds
- Pitfalls of different strategies - examples of where they can go wrong
Financial analysis
- “S”: Size - reviewing size, diversification and market position of fund
- “M”: Market risk - volatility measures – standard deviation, correlations, VaR, stress simulations, concentrations etc.
- “A”: Asset quality - liquidity and valuations
- “L”: Liquidity - redemption risk and financing arrangements
- “L”: Leverage - gross and net leverage calculations, limitations of leverage calculations
- “P”: Performance - bench marking performance against indices and evaluating past performance; measuring risk and performance – Sharpe and Sortino ratios; peak to trough drawdown
- Case study - Importance and limitations of performance measures
Early warning signals
- Summary of major failures and causes
- Common themes
- Case study - Long Term Capital Management and Amaranth Advisors
FUND MANAGER
Due diligence
- Key issues - experience levels; size, affiliation
- Sustainability of business model
- Regulation and supervision, where appropriate
Risk management
- Investment process
- Operational and credit risk
- Market risk control - appropriate limit and control structures for different strategies
STRUCTURE
Structured approach
- Using the purpose payback model to evaluate transactions
- Types of risk when dealing with funds - credit, market, operational, reputation
- Exposure profile - assessing the appropriateness of the structure in terms of amount, maturity etc.
- Ranking - establishing and maintaining a senior position
- Pricing - evaluating the risk ~ return profile of the transaction
Focus on safeguards
- Types - collateral, unsecured thresholds, covenants, break clauses, NAV triggers, NAV floor, cross default
- Collateralisation of trading transactions - measuring and margining exposure
- Portfolio margining
- Legal documentation - ISDA, prime brokerage and repurchase agreements
CASE STUDY
- Perform a complete analysis and risk rating of a new hedge fund counterparty
- Recommend how proposed transactions should be structured.
Workshop Times
Below are typical timings for our courses; upon registration we shall advise you if these have changed.
Breakfast: 8.30am
Course Start: 9.00am
Course End: Between 5.00pm and 5.30pm
Lunch starts between 12.30pm and 1.00pm, and lasts no longer than 1 hour.
Short breaks of 10 - 15 minutes are taken mid morning and mid afternoon.