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Case Study:
Pine Street Capital
By George Chacko, Eli Peter Strick
Harvard Business Publishing
Product number: 201071-PDF-ENG, Length: 17p
To purchase the case, please visit: http://hbr.org/product/pine-street-capital/an/201071-PDF-ENG
Due date: December 05, 2013
Questions:
1- What risks does PSC face? How has it hedged these risks historically? Should it continue to hedge these risks?
- Market neutral fund – fund hedged out all market risk
- In the past, they hedged this out by short-selling shares of a market index
- Due to the unprecedented volatility seen in the markets over the past several months, considering hedging by purchasing put options on the market index
- Specialized in the technology sector and felt they could pick outperforming stocks in this sector o Felt less comfortable making bets on the direction of the entire market
- Initially been using a short-sale strategy to eliminate general market risk from the fund which was accomplished by: o Expected PSC Portfolio Return = alpha + beta * Market Return combined with data on PSC’s portfolio holdings and market returns, PSC established a relationship between the performance of the market and PSC’s portfolio o Beta – measured how the portfolio responded to changes in the market o Alpha – amount of return in excess of that due to market risk o Therefore, beta was a measure of the market risk of PSC’s portfolio while alpha measured its expected return if market risk were eliminated
- Goal was to eliminate market risk and was achieved by shorting the market (used the Nasdaq as a proxy) in proportion to the beta of the assets in the portfolio
- Finding positive alpha stocks in the technology sector was exactly what PSC felt to be its comparative advantage
- Long run goal of maintaining a debt ratio of 50%
- Over the past year, technology sector had been extremely volatile due to tech bubble – huge returns during 1999 and Q1 2000 but declined significantly
Pine Street Capital
By George Chacko, Eli Peter Strick
Harvard Business Publishing
Product number: 201071-PDF-ENG, Length: 17p
To purchase the case, please visit: http://hbr.org/product/pine-street-capital/an/201071-PDF-ENG
Due date: December 05, 2013
Questions:
1- What risks does PSC face? How has it hedged these risks historically? Should it continue to hedge these risks?
- Market neutral fund – fund hedged out all market risk
- In the past, they hedged this out by short-selling shares of a market index
- Due to the unprecedented volatility seen in the markets over the past several months, considering hedging by purchasing put options on the market index
- Specialized in the technology sector and felt they could pick outperforming stocks in this sector o Felt less comfortable making bets on the direction of the entire market
- Initially been using a short-sale strategy to eliminate general market risk from the fund which was accomplished by: o Expected PSC Portfolio Return = alpha + beta * Market Return combined with data on PSC’s portfolio holdings and market returns, PSC established a relationship between the performance of the market and PSC’s portfolio o Beta – measured how the portfolio responded to changes in the market o Alpha – amount of return in excess of that due to market risk o Therefore, beta was a measure of the market risk of PSC’s portfolio while alpha measured its expected return if market risk were eliminated
- Goal was to eliminate market risk and was achieved by shorting the market (used the Nasdaq as a proxy) in proportion to the beta of the assets in the portfolio
- Finding positive alpha stocks in the technology sector was exactly what PSC felt to be its comparative advantage
- Long run goal of maintaining a debt ratio of 50%
- Over the past year, technology sector had been extremely volatile due to tech bubble – huge returns during 1999 and Q1 2000 but declined significantly