Build and present hedge fund strategy to expert judges

Ideas For Group Project

Momentum vs Mean-Reversion / Trend vs Counter-Trend:

Study the profits of momentum (trend) or reversals (counter-trend) in equity, industries, commodities, FX, or other markets. See papers in class 2. There are many others, e.g. Chan, Jegadeesh, and Lakonishok (1996), "Momentum Strategies," The Journal of Finance, vol. 51, no. 5., pp. 1681-1713.

Value investing or HML, size investing SMB:A valuation ratio (B/M, P/E, etc.)Analysts expectations, changes in earnings, growth, ratingsNet stock issues, corporate actions, spin-offs, split-offsAccruals, re-statements, fraud, new jetsConvertible bond arbitrage:

Get data on convertible bond prices and stock prices of the same companies and implement a back-test of the strategy. See also Agarwal, Fung, Loon, and Naik, "Risk and Return in Convertible Arbitrage:

Evidence from the Convertible Bond Market," working paper.

•Carry-trade:

Get data on interest rates (BBG-BBA) and exchange rates (oanda.com) for a number of countries and consider the return on the carry trade. Is the risk symmetric, i.e. equal size of upside and downside returns?

•Pairs-trading:
Some securities "should" follow each other, but sometimes diverge. How to define pairs? Look e.g. at Royal Dutch/ Shell and similar pairs and see also Gatev, Goetzmann, and Rouwenhorst (2006), "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," The Review of Financial Studies, vol. 19, no. 3, pp. 797-827.

•Swap spread arbitrage:
Profit from the difference between two virtually risk free rates, the Treasury rate and the swap rate. See Duarte, Longstaff, and Yu (2005), "Risk and Return in Fixed Income Arbitrage: Nickels in Front of a Steamroller?," working paper.

•Yield curve arbitrage:
Make a strategy of risk free securities of various maturities. See Duarte, Longstaff, and Yu (2005) as above.

•Excess volatility:
If traders trade "too much" and "push prices around excessively", then how do you profit from this? Get inspiration from e.g. Greenwood (2006), "Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights," forthcoming Review of Financial Studies.

•(Shorting) Index options:
Consider index option strategies, such as selling at the money straddles. When is the strategy most profitable? See e.g. Amin, Coval, and Seyhun (2004), "Demand for Portfolio Insurance and Index Option Prices," Journal of Business 77, no. 4.

•Earnings announcement drift:
Is it profitable to buy companies with good earnings news and short those with bad news, after the news is released? See e.g. Bernard and Thomas (1989), "Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?" Journal of Accounting Research, vol. 27, pp. 1-36.

•Distressed investing
How do you identify opportunities among distressed bonds? How to evaluate default risk and recovery in case of default? Can bond holders be active investors? What is return to a diversified portfolio of distressed bonds (i.e. with no attempt of security selection) and does this capture most of the risk premium? (Altman)

•Dedicated short bias
How can you identify short-selling ideas? Are there ways of identifying frauds or does forensic accounting help? Is certain behavior of management a tell-tale sign of trouble?

•Emerging markets
How do some of the investment strategies mentioned above work in emerging markets? What special considerations (e.g. costs, barriers, and risks) must be taken into account when investing in emerging markets? What are the special opportunities? How much of emerging market hedge fund returns can be explained by simply being long emerging market equity indices?

•Selecting hedge funds building a FOFs
How do you select hedge funds? How should you analyze return data, and what other data is available (e.g. 13F, 13D, etc.), and how can this be used to cross-validate managers? How do you combine hedge funds into a portfolio? What is the best way to allocate capital across styles?

•Dual-Listed Companies (DLCs)
Securities that have their listings on two separate exchanges should not have excess co-movement, right? Bedi, Richards, and Tennant, "The Characteristics and Trading Behavior of Dual-listed Companies," Reserve Bank of Australia working paper.
http://papers.ssrn.com/sol3/papers.cfm?