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Investments – Hedge Fund Management Project

Each student will run a $1,000,000 portfolio. Trading accounts will be active on Thursday, March 12TH and end on Thursday May 21st (10 weeks total). PLEASE ENSURE THAT YOU REGISTER BEFORE WEDNESDAY MARCH 11TH TO ENSURE YOU ARE ABLE TO ACCESS THE SYSTEM.

Each student is to assume the role of hedge fund manager and to design and execute an appropriate strategy to maximize the portfolio’s return over the eleven (10) week investment horizon. The clients of the fund have specified capital appreciation as the main investment objective and have no short-term cash needs. Your challenge will be to design and execute an investment strategy that satisfies the client over the 10 week investment period. Your grade for this project is based on several factors as outlined on page three. Each student will be responsible for articulating the investment objective, formulating an appropriate investment strategy to meet the objectives, conducting the necessary research, selecting the appropriate securities, executing trades, tracking daily performance, and rebalancing the portfolio when necessary.

Investment teams will also be formed and a portion of your grade based on team performance. As a result, team meetings/collaborations and discussions are highly encouraged. These teams will also be assigned an additional project to report on certain economic indicators during the semester. More on this subject will be discussed in a later class.

In addition, the portfolio will be an “active” trading account as opposed to a “passive” trading account. Each student starts with 200 transactions (you may choose to buy additional trades). In your account you must establish a minimum of 40 trades.

What to Do During the Trading Period:

  • During the week of March 9, each student will submit a typed statement identifying the following: (1) name, phone number and email address, (2) investment objectives, planned trading strategies, choice of benchmark index, and (3) a matrix of the various positions that are expected during the semester. This matrix will include the various asset categories, names of some specific investments within each category, as well as a range, in dollar values, placed in each category (total $1,000,000).
  • Each student will make a presentation of his/her objective/strategy. Feedback will be provided from the instructor as well as from team peers regarding the soundness and practicality of the strategy. These presentations will occur during the class on March 12.
    • Investment Objective: The primary investment objective has been outlined for you in the above section (maximize your return). You should also include a specific rate of return objective as well as a risk level (beta) objective during the 10 week investment period (establish an appropriate range to target over the period. Remember that it is only an ten week period.)
    • Specifiy your investment style: technical/ fundamental or some mix.
    • Trading Strategies: As discussed above, part of your investment strategy should specify an asset class allocation mix/matrix (% in ETFs, % in equities, % in bonds, etc.) and can include all or some of the following types of investments available on Stocktrak: stocks, bonds, mutual funds, options, spots, futures and futures options. Consider using ETFs (http://finance.yahoo.com/etf) to maximize diversification without having to acquire multiple individual securities.
    • Your strategy should incorporate the use of all order types including market, limit and stop orders. (See additional handout for a description of the order types.)
    • Optional: Your strategy can include trading on the international exchange operations; however, you must have an understanding of those markets. This option is allowed primarily for international exchange students who wish to explore their home market and should not be utilized as an experiment.
    • Be as specific as possible in terms of your selections and the percentage of funds employed in each area. Attempt to make selections that are appropriate given the current economic climate. For the fundamental traders, you may want to check out the yahoo stock screener at the following address: http://screener.finance.yahoo.com/presetscreens.html . For the technical traders, you may want to check out: http://biz.yahoo.com/charts/index.html. These two web sites will be explored in a later class.
    • It is very important to remain informed regarding the current economic climate and political events occurring in the world and global marketplace. One very effective method is to watch CNBC daily if possible at market open (9:30 am) and again at market close (4:00 pm), to read/sign up for web based ‘market-alert’ reports, and to browse relevant web sites and print media for information regarding economic/political news.
    • It is highly recommended to minimize the number of different financial assets selected for the portfolio. It is very challenging to track the portfolio holdings over time. It is recommended that you have at least ten different types of assets but no more than fifteen.
    • Making a selection based on a hunch or using a “seat-of-the-pants” approach will not score well for this project. If you can’t justify the selection to your client then don’t recommend it for the portfolio.
  • Trade-Log: Keep a record of the rationale for each trade decision that you make during the simulation.
  • Collect articles that discuss the securities that you trade and provide relevant economic advice important to your portfolios success.
  • Track the daily performance of your portfolio and your benchmark index (keep a log of the total value of your portfolio).
  • Be sure to formalize (get approval) for any modifications you make to your portfolio’s objectives and/or strategy. Trades executed that do not conform or follow your investment objectives will not score favorably. If you decide you want to change your strategy, you must justify your decisions and obtain both instructor and team approval.
  • MIDTERM and FINAL PRESENTATION: Each student will present a midterm overview as well as a final presentation of your portfolio performance (see course syllabus schedule).
  • The trade-log, articles, and final report will be due on Thursday March 21st of finals week.

Final Report and Project Grade

  • • 25% will be based on defining your initial investment objectives and then designing and executing the trading strategies (including modifications during the semester) necessary to reach your investment goals. Some questions to consider include:
    • Do you feel the selections you made and the investment strategies you took were appropriate for your client given the investment objectives and target risk/return goals that you selected?
    • What specific steps did you take during the semester to attempt to adjust your portfolio to better achieve your target? How successful were these steps?
    • Did you learn anything about short-term trading? Market timing? Trading on news? Economic indicators?
  • 20% will be based on your ability to follow the trading rules (number of trades, types of positions (long and short), types of trades (limit and stop), diversification and asset allocation, choice of benchmark, use of cash, tracking your performance, as well as articles collected and depth of investment research activity).
  • 20% will be based on the return performance of your portfolio relative to your peers. Return will be measured as the holding period return as tracked on Stocktrak. Risk is also important and is measured using standard deviation, beta, and other qualitative characteristics like asset allocation and risky investments that are based on “hunch” rather than investment strategies. Beware of executing risky strategies that are not part of your original investment objectives to generate a windfall.
  • 15% will be based on your team’s rank in the class.
  • 15% will be based on an analysis of the six best performing and 6 worst performing investments in your portfolio.
  • 5% will be based on a critique of your portfolio using what you have learned through the class and from your portfolio simulation experience. If you had to do it all over again, would you change your investment objectives and strategy in any way? If not, why? If yes, how?

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