TWENTY ONE Ho A fund manager is considering an investment in two stocks. Stock A
ID: 2804988 • Letter: T
Question
TWENTY ONE Ho A fund manager is considering an investment in two stocks. Stock A is a company that is near bankruptcy but believes there is still value in it. Stock B has just fired its entire executive team and is in the process of a major re-organization. What type of hedge fund strategy is this manager exploiting? Briefly describe the features of this type of strategy 4. 5. You've just been appointed manager of the XTC Global Macro Hedge Fund. What securities or strategies would you employ and how would you go about running this fund?Explanation / Answer
4. The type of hedge fund strategy that the manager is exploiting here is the ‘event driven’ strategy. One of the companies is on the verge of bankruptcy while the other company is in the midst of a corporate reorganization. As one of the companies is on the verge of bankruptcy, but has not yet filed, the fund manager will, in all probability, sell short the equity with the view that share prices will fall when the company actually files for bankruptcy.
In case of the second company which is in the midst of a corporate restructuring the manager would exploit the mispricing opportunities.
5. As a manager of XTC Global Macro Hedge Fund I will employ a strategy of investing in the right mix of assets with an objective of maximizing returns if the predicted outcome occurs. Political and economic developments may lead to broad market swings and fluctuations and my strategy would be to benefit from these swings.
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