Hedge Funds


Course Number: MGT 647



Instructor William N. Goetzmann


Website: http://viking.som.yale.edu/will/hedge/hedge-syllabus.html


E-mail contact william.goetzmann@yale.edu


Time and Place: Monday, 4:10 to 6:50


Teaching Assistant: Ming Fang

Assistant to Professor Goetzmann, Mary Ann Nelson, ICF, 46 Hillhouse, room 103


Course Overview


An in-depth study on the theory and management of hedge funds. We will focus on their strategies, including M&A arbitrage, market neutral investing, statistical arbitrage, fixed income arbitrage, global macro arbitrage and derivatives arbitrage. Topics will include hedge fund compensation, performance evaluation, risk management, including operational risk, and the role of arbitrageurs in the capital market.


Assignments will consist of (1) a simulated portfolio report to be done as a group or individually (2) two manager briefs, done individually and (3) two cases done as a group or individually.


Simulated portfolios.  Open your portfolio through Stocktrak.  The course has been registered with William Goetzmann as the instructor.  The cost for each portfolio is $25 for the semester.  Groups or individual students may run as many portfolios as they wish and report the aggregate and disaggregate performance at the end of the term.  Trading may commence 1/31/05.You must announce the general style and approach you intend to use in an E-mail to the professor and the TA. You will be evaluated according to this style. StockTrak limits the number of trades to 200.


Students will manage a simulated portfolio according to a specific style.  Summaries of the portfolio performance will be presented in the final class.



Jaeger, Robert, AllAbout Hedge Funds



Lederman, Jess,(Editor) and Robert A. Klein (Contributor),Hedge Funds: Investment and Portfolio Strategies for the Institutional Investor.


Class Number



Guest Speaker/Case





History and theory of hedge funds


Introduction, Hedge Funds on the Frontiers


Review of the Basics of Investment Models. CAPM CAPM2, APT

Hedge Funds and Financial Frontiers




Manager visit I: source of alpha

Andrew Redleaf, Whitebox Partners

Theory of Hedge Funds I: Arbitrage Pricing

J.P. Morgan Report: Have Hedge Funds Erroded Opportunities?


The End of Arbitrage 1


The End of Arbitrage 2



Hedge funds as security selectors


Theory of Hedge Funds II:  Applications of linear models in performance evaluation


Value at Risk

Goetzmann and Ross, “Hedge Funds, Theory and Performance



Manager II: Hedge funds as insurance providers

Carl Schecter, Nomura Securities, Event Driven,  M&A Arb.

Limits of Performance Measurement: “Sharpening Sharpe Ratios

Mark L.Mitchell and Todd C.Pulvino, “Characteristics of Risk and Return in Risk Arbitrage


Mark L.Mitchell, Todd C.Pulvino and Erik Stafford , “Price Pressure Around Mergers



Case discussion: performance evaluation in practice

CASE: Alpha Investing



Mark L.Mitchell, Todd C.Pulvino and Erik Stafford, “Limited Arbitrage in Equity Markets


Evan Gatev, William N. Goetzmann and K. Geert Rouwenhorst, “Pairs Trading: the performance of a relative value arbitrage strategy


Goetzmann, Ingersoll, Spiegel and Welch, “Sharpening Sharpe Ratios

Lo, Getmansky and Makarov, “An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns


Shleifer, Andrei and Robert Vishny, 1997, “The Limits of Arbitrage


Powerpoint Presentation Pair Trading



Manager III: Fixed Income and MBS


Fixed Income Models for Arbitrageurs


MBS valuation


Interest Rate Factors


Ming Fang

Jorion, “Risk Management Lessons from Long-Term Capital Management”   


Okunev and White, Hedge Fund Risk Factors and Value at Risk of Credit Trading


Gabaix,  Krishnamurthy, Vigneron, “Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market”


Heidari and Wu, “What Constitutes a Good Model? An Analysis of Models for Mortgage Backed Securities”




Manger IV: HF Intermediaries & Fund of Funds

Bob Jaeger, Evaluation Associates

Style Analysis of Hedge Funds

Brown, Goetzmann, and Liang, “Fees on Fees in Funds of Funds”

Brown and Goetzmann. “Hedge Funds with Style”


Fung and Hsieh, “Benchmarks of Hedge Fund Performance: Information Content and Measurement Biases”



HF in the Investment Portfolio

CASE: Multi Funds

High Water Mark contracts, Risk Analysis

Goetzmann, Ingersoll and Ross, “High-Water Marks and Hedge Fund Management Contracts”



Manager Compensation

Fred Busk

Risk Analysis: Volatility and Operational risk

Lo, “Risk Management for Hedge Funds: Introduction and Overview

Brown, Gallegher Steenbeek and Swan, “Double or Nothing: Patterns of Equity Fund Holdings and Transactions

Bing Liang, “Hedge Fund Returns: Auditing and Accuracy

Brown, Goetzmann and Park, “Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs”



Manager V: Global Investment Frontier

Richard Deitz VR Capital


International Hedge Fund Investing


Brown, Goetzmann and Park, “Hedge funds and the Asian currency crisis”


Goetzmann, Spiegel and Ukhov Modeling and Measuring Russian Corporate Governance: The Case of Russian Preferred Shares

Fung and Hseih, “Measuring the Market Impact of Hedge Funds



Portfolio Theory

CASE: Foote School Case


Foote School Case





Favre and Galeano, “Hedge Funds Allocation: Case Study of a Swiss Institutional Investor”



Regulation and Industry Evolution


Regulation and Hedge Funds Powerpoint Presentation

Getmansky, Lo and Mei, “Sifting through the Wreckage: Lessons from Recent Hedge-Fund Liquidations”

Brunnermeier and Nagel, “Hedge Funds and the Technology Bubble”


Staff Hedge Fund Report Fact Sheet” Implications of the Growth of Hedge Funds

Report of the Staff of the U.S. Securities and Exchange Commission


President’s Working Group on Hedge Funds:

 Hedge Funds, Leverage, and the Lessons of

Long-Term Capital Management, 1999.


Please follow link to full report in pdf.



Portfolio Presentations

Summary of  Class Performance