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Strategies and Sectors

Merger Arbitrage
               Merger arbitrage investors are typically involved in the purchase of a company’s stock that is to be acquired and the corresponding short sale of the acquiring company’s stock. Detailed analysis is performed in order to estimate the probability of the “deal” closing, the price at which it will close, the time it will take to close, and any other regulatory risks that may apply. Merger arbitrage Investment Advisors are involved in both stock for stock deals and cash for stock deals. Merger arbitrage Investment Advisors vary widely in their use of leverage and cash. 

Distressed Securities
                Distressed securities investing involves the purchase and/or sale of publicly traded securities involved in bankruptcy or reorganization. Distressed investors will invest in different phases of bankruptcy. Typically, the phases are pre-bankruptcy, bankruptcy, and post-bankruptcy. Investors will often utilize the spectrum of securities within a firm’s capital structure. Those securities are, listed in terms of risk, as follows: equities, trade creditor claims, junior unsecured public debt, senior unsecured public debt, senior secured public debt, and senior secured private debt. Investors also differ in their willingness to take “control” or “blocking” positions in the companies they are buying. 

Long Biased
                Long biased Investment Advisors will have net market exposure (gross longs minus gross shorts) greater than zero. These Investment Advisors tend to believe, that over time the equity markets appreciate. Therefore, they prefer to  hove long exposure to the equity markets. Long biased Investment Advisors do realize, however, that there is ample opportunity to profit from the short sale of overvalued equities. Long biased managers vary greatly in their net exposure. The commonly utilized “Jonesian” approach allows for net exposure ranging from 40-70%.

                Opportunistic Investment Advisors will vary their exposure from net long to net short depending upon their market outlook. Opportunistic strategies can become rather concentrated in certain economic sectors, capitalization ranges, or investment styles depending on the opportunities that present themselves.

Convertible Arbitrage
            Relative value hedging in convertible bonds primary involves long positions in convertibles or warrants and short positions in the underlying stock in an effort to capitalize on relative pricing inefficiencies. Convertible and warrants are priced as a function of the price of the underlying stock, expected future volatility of returns, risk free interest rates and, in the case of convertibles, the issue-specific corporate/Treasury yield spread. In certain cases, these instruments are not hedged directly with the underlying stock, but rather with an index. 

Fixed Income Arbitrage
            Fixed income arbitrage involves the identification and exploitation of mispricing in the bond markets. In the active and competitive U.S. bond markets large relative mispricings are rather uncommon. Therefore, Investment Advisors will often utilize leverage to further benefit from small pricing errors.

Statistical Arbitrage
            Statistical arbitrage Investment Advisors utilize a quantitative, or “black box,” approach to investment management. Complex mathematical tools are used to identify statistically significant mispricings in stocks, bonds, currencies, and/or commodities. Once identified, Investment Advisors trade to exploit the momentary pricing aberrations. In order to fully exploit the limited opportunities available, leverage and rapid computer enhanced trading techniques are often involved.

Market Neutral Equity Arbitrage
            Market neutral equity arbitrage is a broad investment style that can involve a number of sub-strategies. Market neutral Investment Advisors are seeking to generate consistent absolute returns independent of the broader equity markets. Investment Advisors invest both long and short and will typically match their longs and shorts so that the portfolio is 0% net long on either a dollar-weighted or beta-weighted basis.

Short Selling
            Short selling Investment Advisors sell short equities based upon fundamental analysis in an effort to profit from declining equity prices. An allocation to short selling Investment Advisors is typically utilized as a hedge against the natural long bias of certain strategies.