Pine Street Capital Case
| Pine Street Capital | | |
FINA5290 Derivatives Analysiss
Individual Assignment
1. What is a hedge fund? How do hedge funds differ from mutual funds?
Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. Hedge Fund incorporate to any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their interests with investors in the fund. A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year.
Difference between hedge funds and mutual funds are as follow:- 1. Hedge funds are not publicly owned and thus less regulated than mutual funds 2. Hedge funds are more flexible in investment strategies and risk management compared with mutual funds. 3. Hedge funds could use leverage while mutual funds could not. 4. Hedge funds can hedge by shorting or using options to limit the overall risk of their investment while mutual funds could not.
2. What risks does Pine Street Capital want to hedge and what risks is Pine Street Capital willing to bear? Why? Risks that Pine Street Capital wanted to hedge is: market related risks. Reasons: * PSC feels that they are weak in anticipating moves in the overall market and thus would like to hedge such risks. * Pine Street Capital established relationship between the performance of PSC’s portfolio and the market. Thus PSC adopted the market-neutral strategy as they want to eliminate the market risk (beta risk) which was hedged from PSC’s
FINA5290 Derivatives Analysiss
Individual Assignment
1. What is a hedge fund? How do hedge funds differ from mutual funds?
Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. Hedge Fund incorporate to any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their interests with investors in the fund. A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year.
Difference between hedge funds and mutual funds are as follow:- 1. Hedge funds are not publicly owned and thus less regulated than mutual funds 2. Hedge funds are more flexible in investment strategies and risk management compared with mutual funds. 3. Hedge funds could use leverage while mutual funds could not. 4. Hedge funds can hedge by shorting or using options to limit the overall risk of their investment while mutual funds could not.
2. What risks does Pine Street Capital want to hedge and what risks is Pine Street Capital willing to bear? Why? Risks that Pine Street Capital wanted to hedge is: market related risks. Reasons: * PSC feels that they are weak in anticipating moves in the overall market and thus would like to hedge such risks. * Pine Street Capital established relationship between the performance of PSC’s portfolio and the market. Thus PSC adopted the market-neutral strategy as they want to eliminate the market risk (beta risk) which was hedged from PSC’s