The University of Hong Kong Faculty of Business and Economics

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1 The University of Hong Kong aculty of Business and Economics MIN7014 und Management and Alternative Investments Module 4, Spring 2015 Instructor: Dr. Chun Xia Tel: Time and Venue: Jan 30-eb 14 riday, 6:45-9:45pm; Saturday, 2:00-5:00pm B2/B4, Admiralty Town Center Exam Time: eb 20, 7:00-9:00pm. Course Description: After enduring a roller coaster ride through the financial crisis, 2011 year-end asset under management for global alternatives investments, namely, hedge fund, private equity, real assets, commodities and managed futures, credit derivatives and structured products reached record levels of $6.5 trillion, having grown at a five-year rate of over seven times that of traditional asset classes. Growth is expected to continue, fueled by increasing allocations by institutional investors and the movement of alternatives into the retail investment mainstream. Despite this fast growing trend, alternative investments at large and hedge fund in particular remain the most mysterious and least understood sector of investment industry. This course provides a comprehensive overview of alternative investment vehicles with the emphasis on hedge fund investments. A wide range of real life cases will be used to illustrate various investment strategies used by hedge funds and proprietary traders. The course also covers institutional issues related to short selling, liquidity, margin requirement, risk management, and performance measurement. Course Website: The Moodle course website can be accessed from your HKU portal under the elearning menu. Please check your HKU box for class announcement. Prerequisites: Students must have knowledge on asset valuation at postgraduate level. Course Material and References: There is no required textbook. The lectures are based on 3 sources: (1) My own lecture notes, selected case studies and on-going market events; (I reserve the copyrights for course structure and lecture notes.) (2) David Stowell, 2012, Investment Banks, Hedge unds, and Private Equity, 2 nd 1

2 edition, Academic Press [optional textbook]; (The best book in the market, my lecture notes are closely linked to it. Owning it will greatly boost your class performance in homework, presentation, and exam.) (3) Mark J. P. Anson, et al., 2011, CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2 nd edition. John Wiley & Sons [optional]; (It is the official textbook for the Level I Chartered Alternative Investment Analyst (CAIA) exam offered by the CAIA Association ( You can watch a short video at about the program.) Course Learning Objectives: By the end of this course, students should be able to: CLO1. Characterize the common features of alternative investments and their markets CLO2. Understand the mechanism of various investment strategies and learn to build optimal portfolios that help to achieve absolute return CLO3. Assess the benefits, such as return enhancement and/or risk diversification and pitfalls of alternative investments CLO4. Advise clients on how to incorporate alternative investment in their portfolio according to their investment objectives and risk tolerance Alignment of Program Learning Goals and Course Learning Objectives: Program Learning Goals PLG1. Acquire quantitative techniques of finance PLG2. Acquire advanced knowledge of financial products. PLG3. Apply and integrate the skills and knowledge in the financial profession. PLG4. Inculcate professionalism. Course Learning Objectives Teaching and Learning Activities: TLA1. Lectures and Class Participation TLA2. Group Group Projects: In-Class Presentation and Report Writing TLA3. Consultation Assessment Task: AT1: Class Participation (5%) Grading Criteria for Class Participation Extremely well prepared for class discussion, very active in sharing views and attended at least 90% of classes Partially prepared for class discussion, active in sharing views and attended at least 80% of classes 2

3 C+, C, C- Not well prepared for class discussion, limited active in sharing views and attended at least 70% of classes Not well prepared for class discussion, no sharing views and attended at least 60% of classes Poorly prepared for class discussion, no sharing views and attended at least 50% of classes AT2: Homework (15%) AT3: Examination (40%) C+, C, C- Grading Criteria for Homework and Examination Score correctly on more than 80% of questions Score correctly on less than 80% of questions Score correctly on less than 70% of questions Score correctly on less than 60% of questions Score correctly on less than 50% of questions AT4: In-Class Presentation and Report Writing (40%) The students must form groups of up to 2 members (note that this is subject to change, depending on the total enrollment) and analyze either (i) an alternative investments/hedge fund case study or (ii) an alternative investments/hedge fund strategy. Ideas for case and strategy studies can be found in the textbook and provided on Moodle course webpage, but the students are encouraged to come up with their own ideas. Each group must present the findings in class (maximum 10 minutes) and document them in a written report (in WORD or PD). The reports and slides are due in my on a specified date (To be announced) after the last day of class. The group analyzing a case study must describe the involved parties and the events (fund managers backgrounds, their trading strategies and performance evaluation), analyze the underlying economic mechanisms at play, discuss the general lessons that can be learned, and are encouraged to provide academic literature, empirical evidence (if any) or estimate the returns (if you can) that that used by the involved hedge fund(s) to verify anecdotal evidence. The group analyzing a strategy must study its underlying economic rationale the relevant evidence from the academic literature (if any), evaluate the strategy s past returns using real data ( back testing ), estimate the associated transactions costs and use of capital /margin (if you can), and describe its success or failure using several performance measures or real life cases. Grading Criteria for Group Presentation The presentation was highly successful at communicating the essential elements of the topic to the audience; Concepts were thoroughly explained and clarified; The presentation demonstrated deep understanding and comprehension of the topic; There was clear evidence of independent though and reflection on the topic; The topic was covered in a highly professional and organized manner; The presenter displayed excellent verbal skills and delivered a highly interesting, coherent presentation at an appropriate level for the audience. The presentation was successful at communicating the essential elements of the topic to the audience; 3

4 C+, C, C- Most concepts were well explained and clarified; The presentation demonstrated sound understanding and comprehension of most aspects of the topic; The topic was covered in a professional and organized manner; The presenter displayed good verbal skills and mostly delivered an interesting, coherent presentation at an appropriate level for the audience. The presentation adequately communicated most of the essential elements of the topic to the audience; Most concepts were adequately explained; The presentation demonstrated good understanding and comprehension of most aspects of the topic; The topic was covered in an organized manner; The presenter displayed adequate verbal skills and mostly delivered a mostly coherent presentation at an appropriate level for the audience. The presentation basically covered the main aspects of the topic; The presentation demonstrated basic understanding and comprehension of most aspects of the topic; The topic was covered in a basic manner; The presenter displayed minimal standards of verbal skills, coherence, and organization. The presentation was poorly addressed and concepts were inadequately explained; The presentation did not demonstrate sufficient understanding and comprehension of the topic; The topic was covered acceptably and/or was poorly organized; Verbal skills were inadequate. I do not set requirement for report pages, but since I started teaching this course from 2010, the average length of reports is around 20 pages (you do not need to write 20 pages if can use 15 pages to tell your compelling story, but reports can be as long as 30 pages) excluding cover page, tables, figures, regressions, appendix and references (if any). Of course you can put tables and figures in the main text. The specification of the standard format is as follows: A4 paper, double space with minimum one-inch margin on all sides, a font of 12 Times New Roman. The report will be checked by anti-plagiarism software. Zero grade point will be given if plagiarism behavior is identified. Grading Criteria for Written Reports All aspects were addressed and researched in great depth; Demonstrated a clear understanding of and the ability to apply the theory, concepts and issues relating to the topic; Clearly identified the most critical aspects of the task and adopted a critical perspective; Developed excellent argument and offered a logically consistent and well-articulated analysis and insight into the subject; Drew wildly from academic/professional literature whilst maintaining relevance; All aspects conformed to a high academic/professional standard. Most aspects were addressed and researched in depth; Demonstrated a good understanding of and some application of the theory, concepts and issues relating to the topic; Identified the most critical aspects of the task and adopted a critical 4

5 C+, C, C- perspective; Showed some evidence of analysis, supported by logical argument and insight into the subject; Drew on relevant academic/professional literature; Most aspects conformed to a high academic/professional standard. Most aspects were addressed and researched adequately; Demonstrated a good understanding of the theory, concepts and issues relating to the topic but limited application to the topic; Some presented argument showed some insight but not always consistent and logical; Drew upon an adequate range of academic/professional literature; Most aspects conformed to an acceptable academic/professional standard. Basic aspects were addressed and researched adequately; Demonstrated mainly description, showed basic understanding of the topic but no application; Showed little evidence of analysis but no clear and logical argument relating to the subject; Drew primarily upon course materials; Limited aspects conformed to an academic/professional standard. Basic aspects were superficial, inadequate or absent; Demonstrated limited understanding of the topic and drew conclusion unrelated to the topic; The written work was not of an academic/professional standard. Alignment of Course Learning Objectives, Teaching and Learning Activities and Assessment Tasks: Course Learning Objectives Teaching and Learning Activities Assessment Tasks CLO1 TLA1, TLA2, TLA3 AT1, AT2, AT3, AT4 CLO2 TLA1, TLA2, TLA3 AT1, AT2, AT3, AT4 CLO3 TLA1, TLA2, TLA3 AT1, AT2, AT3, AT4 CLO4 TLA1, TLA2, TLA3 AT1, AT2, AT3, AT4 Target Schedule: Lecture Textbook Topics 1 Ch.11 Overview of Alternative Investments and Hedge und Industry What are alternative investments and hedge funds? Evolution of hedge fund industry ( ). Hedge funds versus traditional 2 Ch Ch.12 Cases 5, Chs Cases 6,7 mutual funds. Compensation of hedge fund managers. Hedge unds Size, Impact, and Regulation Database on hedge fund returns and indices. How large is the industry? Who are the hedge fund managers? Regulatory environment. Hedge und Strategies (1) and Guest Lecture Dedicated short bias, Equity long/short strategies. Market neutral strategy, Event driven strategies (risk arbitrage and shareholder activism). Topics include short squeeze, pairs trades, statistical arbitrage, high frequency trades, cash tender offer, stock-for-stock offer, delta hedging, etc. Hedge und Strategies (2) and Guest Lecture Convertible arbitrage strategy. Relative value strategies. Global 5

6 10-11 Ch Student Presentation macro strategies. Topics include delta trading, butterfly trading, CDO, CDS, etc. Guest Lecture Hedge und ailures and rauds, Due Diligence and Risk Management ailures (LTCM, Amaranth, Peleton) and frauds (Bayou, Berdoff) Selecting hedge funds (managers and strategies). Due diligence, monitoring and reporting. Risks, return and utility. Diversification and fund of hedge funds. Structured products on hedge funds (capital-protection and CPPI) Hedge und Investing and Replication (if time permits) Course Policies: As teacher I have the following responsibilities: o Come prepared to every class with well thought-out presentation. o Design class so you can accomplish cognitive objectives listed in the syllabus. o Consider that it is not always your fault if you don't understand the material. o Create mutually respectful classroom environment. As students you have the following responsibilities: o Come prepared to every class by reviewing notes and doing assignments. o Complete all work on time with proper thought. o Consider that it is not always teacher's fault if you don't understand the material. o Ask questions when you don't understand. Asking question is a sign of maturity, not ignorance. Academic Dishonesty The University Regulations on academic dishonesty will be strictly enforced. Please check the University Statement on plagiarism on the web: Academic dishonesty is behavior in which a deliberately fraudulent misrepresentation is employed in an attempt to gain undeserved intellectual credit, either for oneself or for another. It includes, but is not necessarily limited to, the following types of cases: 1. Plagiarism - The representation of someone else's ideas as if they are one's own. Where the arguments, data, designs, etc., of someone else are being used in a paper, report, oral presentation, or similar academic project, this fact must be made explicitly clear by citing the appropriate references. The references must fully indicate the extent to which any parts of the project are not one's own work. Paraphrasing of someone else's ideas is still using someone else's ideas, and must be acknowledged. 2. Unauthorized Collaboration on Out-of-Class Projects - The representation of work as solely one's own when in fact it is the result of a joint effort. 3. Cheating on Exams - The covert gathering of information from other students, the use of unauthorized notes, unauthorized aids, etc. 6