portfolio managmnet

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 EXHIBIT 8-4 Performance of Hedge Fund Strategies and Traditional Assets 1990-2004