Ian Parkinson, as chief pension officer of a large defined-benefit plan, is considering presenting a recommendation that the pension plan make its first investments in three different types of hedge funds: 1) market neutral, 2) convertible arbitrage, and 3) global macro.An analyst who works for Parkinson comes by with the table given below and makes the following comment: "The returns for global macro are very impressive. In fact, there are other strategies that have significantly outperformed the S&P 500, equity market-neutral, and convertible arbitrage over the past 15 years. I think that, based on their returns, we should focus specifically on the other strategies."A. Describe the three alternative strategies that Parkinson is considering, and evaluate each with respect to their level of market risk and credit risk. Interpret their correlations with the S&P 500 and the Lehman Government/Corporate Bond indices as presented in the table above.B. Critique the analyst's statement.

EXHIBIT 8-4 Performance of Hedge Fund Strategies and Traditional Assets 1990-2004 Correlation with Lehman Gov./Corp. Bond Fund or Asset HFCI Event driven Equity hedge Equity market neutral Merger/risk arbitrage Distressed Annual Annual Standard Sharpe Return Deviation Ratio Gov./Corp. Bond MSCI World Lehman 13.46% 5.71% 13.46% 5.59% 15.90% 9.34% 9.24% 2.50% 15.28% Fixed-income 7.62% arbitrage Convertible arbitrage Global Bond 9.07% 10.23% 4.86% 6.07% 3.61% Global macro 16.98% 8.38% Short selling -0.61% 19.39% S&P 500 10.94% 14.65% Lehman 7.77% 4.46% 3.96% 7.08% 14.62% 8.09% 5.23% 1.61 1.64 1.24 1.98 0.99 1.81 0.92 1.50 1.51 -0.25 0.45 0.78 0.19 0.73 Minimum Correlation Monthly with Return S&P 500 6.92% -9.37% -9.70% -1.07% -8.78% -9.71% -6.61% -3.42% -5.41% -14.62% -14.46% -4.19% -13.32% -3.66% 0.59 0.59 0.64 0.09 0.48 0.42 0.06 0.19 0.26 -0.76 1.00 0.13 0.86 0.11 0.17 0.07 0.10 0.24 0.10 0.04 -0.06 0.13 0.34 -0.01 0.13 1.00 0.09 0.74