Case Summary
Leman Alternative Asset Management Company (LAAMCO) manages a fund of the hedge funds, which comprises of portfolios and these portfolios have different investment securities and investment vehicles. Diversified Portfolios have been developed by the hedge fund by following a research driven approach and making use of a range of different risk metrics. The fund managers also monitor the performance of the different portfolios by making use of the advanced risk analytics.
The Senior Vice President of LAAMCO, Thierry Michaud had received the prospectus for one of the most lucrative hedge fund investment, called as the Fairfield Guard hedge fund. Being a derivatives expert it was the job of Michaud to evaluate the performance of this hedge fund and perform a detailed due diligence exercise on this hedge fund, because a recommendation of whether to invest or not had to be made to the fund board in the next board meeting.
Fairfield Guard hedge fund made use of an options strategy, which was known as a split strike conversion or most commonly as collar strategy. The past performance of the fund had been remarkable where it has generated higher returns than S&P500 index and higher Sharpe ratio. The monthly return volatility of the hedge fund was much lower as compared to the returns of S&P500 index. Michaud was intrigued that how a collar strategy can generate such huge returns and such low volatility therefore, he needed to backtest the collar strategy by performing a due diligence exercise and then make a final recommendation to LAAMCO board.
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Case Analysis
We have described what hedge funds are and then examined the reasons for performing the due diligence for the Fairfield Guard hedge fund.
Descriptions of Hedge Funds Description & Due Diligence Rationale
A fund of the hedge funds can be defined as an investment option or alternative investment vehicle for the potential investors, which can include institutions or individuals, and they invest in these funds which means they are actually investing in the assets of these funds. These hedge funds consist of a pool of different securities in which the investors can invest. Although, the hedge fund investing process is not regulated by the US Securities and Exchange Commission but it seems that the regulations would be soon formed for governing the process of the hedge funds.
Since, the hedge funds are unregulated therefore, they tend to invest in a wide array of securities both risky and non-risky and this is contrary to the mutual funds that are regulated by the US SEC. Most hedge funds form portfolios comprising of the traditional securities like stocks of companies and their bonds however, new hedge funds have now began to invest in more risky and sophisticated investments and make use of risky techniques to generate returns such as they enter into short positions or implement long short strategies with the money they borrow. Most hedge funds, like LAAMCO also invest in derivative securities..................
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