Portfolio Management

Investment & Portfolio Theory II

Assignment II

Part I

Question 1

A. The Delta strategy was developed by AQR as an innovative alternative to existing hedge fund replication strategies. By combining 9 major hedge fund strategies into an attractive basket for investors, the Delta strategy was created.

B. The first appealing factor contained by Delta is that it maintains an excellent track record with exceptional performance.

C. The Delta strategy is stated to be innovative relative to typical hedge funds in 2 ways. First, in terms of structure Delta is constructed as a “well-diversified portfolio of hedge fund strategies” though a well-defined investment process. Furthermore, the Delta strategy charges relatively low fees; a management fee of merely 2%.

Question 2

A. As discussed in the case, Funds of Hedge Funds (FOFs) provided an alternative to direct hedge fund investing by allocating investors’ money among a select group of hedge funds. The pros of FOFs include that this strategy is accessible to investors with modest capital and that FOFs have less tedious liquidity rules. Furthermore, FOFs are less likely to encounter liquidity issues as they can obtain liquidity from a multitude of underlying funds. Moreover, FOF managers have claimed that their experience and connections provide access to hard-to-enter funds. Nevertheless, there are also certain cons to investing in FOFs. FOFs are subject to the underlying liquidity of the funds they have invested in and are heavily reliant on the competence of the team of professionals that select the funds and chose allocations among them to produce an optimized portfolio. Finally, FOF fees tend to be high, including an additional layer of fees often as high as half the level of hedge fund fees themselves. Therefore, FOFs provide an appealing alternative to direct investment in hedge funds but this comes at a cost of higher fees and confidence in the FOF management team.

B. The...