hedge fund readings ??! head, increase, corporate, investment, long

profil

ok these reading keeps using some jargon about investment strategies and other stuff. which goes above my head. anyone have the same problem.
1)For starters please explain using simple language and an example. how do you profit from shorting a treasury bond and going long on a corporate bond and how does your credit spread increase make a loss in this case
2) what is investment style specifically give example
thanks

dandman

Floyd, I have not done this reading yet, but i will attempt to answer your first question.
Suppose, a treasury bond is yielding 4% and is selling at par (say $100). Also, there is a corporate bond yielding 6% also selling at par (say $100).
So, if you sell treasury bond and buy corporate bond, you will earn the 2% difference in yields. (ofcourse, this is because you are taking on the credit and liquidity risk associated with that corporate bond). So, if the conditions dont change, you continue to earn this difference of 2%, till the time you close your positions.
Now, lets say, market conditions have changed. Investors have become more risk averse and the credit spread has increased. Which means, people are now expecting more yield from corporate bond wrt treasury bonds. With increased credit spread and increased yield on corporate bond, corporate bond price will fall and leaves you with capital loss when you close your position.

pimpineasy

ya got it thanks rusbus how much have you covered using schweser or cfai?

jmh530

I did quant and also initial readings in equity using cfai but the rest is all from schweser. I am still to do Derivatives, Alternate investments, Portfolio Management and Ethics. Doing FI currently.
Not a good picture but not too bad either
How much of yours is remaining?

bodhisattva

i am also left with, derivatives, portfolio management, and fixed income. all from schweser. how are you finding fixed income? alternative investment is mostly easy you can breeze through it in 4 to 5 days. ethics is 90 percent same form level 1 so i guess we are in the same position.

rgonzalez

Fixed income is not as heavy as FRA for sure. It could be comparable to Corp Finance in terms of heavyness.
Though the chapter on ABS in schweser appears quite abstract. I read that in last 2 days and got throughly bored. I had to look to cfai for the CDO portion in it. It was not much interesting there either.
Other chapters in FI are quite interesting though, so far.
I think the bigger beast remaining for both of us is Derivatives

sgupta0827

To add to Rus1Bus inital post;
Treasuries are normally a safe haven during recessions. The increased demand drives up Treasury prices and as a consequence, yields decrease. Being short a Treasury and long Corporates, you get hit from both sides in this case:
1. Treasury prices increase. You are short these holdings and now obligated to deliver them in the future after purchasing at new higher prices.
2. As an investor, you are long the Corporates. Reccession causes the required yield on Corporates to increase. Your Coporates go down in value as a consquence.
You loose on your short position and also on your long position. Treasury yields drop and Corporate yields go up. A compounding effect on your losses due to your positions and also new higher spread between Corporates and Treasuries.
These type of funds play the spreads and may even incorporate credit derivatives, such as CDS in order to take advantage of arbitrage opportunities. Consequently, these type of funds are usually catorgized as Fixed Income Arbitrage funds. The range in strategies, types of investments held and fund characteristics can vary greatly within the broad Fixed Income Arbitrage Hedge Fund Category. In my opinion, it is most efficient to look at each fund as its own unique type. Degree of leverage can make two Hedge Funds that seem similar on paper, have quite different return characteristcs etc.

transferpricing

Thank you Rus1bus…..hope this helps.