Pine Street Capital

Pine Street Capital
Discussion and Analysis

1

PINE STREET CAPITAL – WHAT RISK TO HEDGE & WHAT TO BEAR?

Hedge: market related risks

1. Currently managing a market neutral fund ($32 AUM)
In the past the market risk was hedged by shorting or short-selling representative shares of the market index In the past the market riskunder was The alternative hedged by shorting hedging the consideration was or shortselling representativehelp of put market risk with the shares of the market the market index options on index

Ready to Bear: individual security related risk; leverage

1. The fund deals with technology driven companies due to the expertise of its fund manager in that area; comfortable in prediction of individual stock related risk/ return 2. Use leverage to maximize returns
2

HEDGE FUND STRATEGIES
Option Based Short-Selling Leverage

• Extreme volatility in the • Used to eliminate market • By using debt to finance a portion of assets, RoE is greater

general market risk from the fund

• Beta of portfolio dynamic, changing rapidly in high volatility market

• Expected Return = α + β ( Market Return)

• Options can better immunize against market fluctuations

• Removes market return component, leaving only alpha return in the portfolio

• However, if assets lose value, then high leverage works against the investor

• Instead of shorting, buy
PUT options

• Return on hedged portfolio = guaranteed α, whether up or down movement

• Keep utilizing leverage and protect against large negative movements
3

BALANCE SHEET EFFECTS OF LEVERAGE

Unlevered Portfolio Assets Equity Assets Equity 50 50 100 100 ROE = 100%

Levered Portfolio Assets Debt Assets Debt 100 50 200 50 Equity Equity 50 150 ROE = 200%

4

SHORT SELLING STRATEGY

1. In normal circumstances the risk was reasonably hedged by using short selling strategy
2. High proficiency of the fund managers in predicting the portfolio beta; systems in