对冲基金多头-空头策略实例 An Example of Long-short Strategy.docx

Part1. The main advantages and disadvantages of a long/short strategyA long/short equity strategy combines buying an undervalued stock and short selling an overvalued stock. When the long position outperforms the short positions, total return of this strategy is positive. The concept of long/short strategy could date back to 1949, when the worlds first hedge fund was established. And at present, long/short strategy is among the most prevalent strategies in this field. According to the way they hedge downside risk, long/short strategies could be grouped into three categories, and I would like to discuss main advantages and disadvantages of each category. 1. Make long and short direction bets based on fundamental researches.Buying securities which are supposed to rise in price while short-selling those that are supposed to decline in price. Basically, short position is used to generate additional returns. In practice, hedge fund managers use a variety of financial instrument such as index options, futures and ETFs to hedge downside risk, preventing the net exposure is too high.Main advantagesCompared with long-only investment, long/short strategy take advantage of those unattractive securities. Provided expected security returns are symmetrically distributed around the market return, long/short takes full advantage of this spread of returns (Jacobs and Levy, 1996). Total excess return of a long/short equity portfolio comes from the long position and short position. Once the price of the short equity declined, the short position contributes a part of profit to the portfolio. In addition, by using long/short strategies, portfolio managers are able to neutralize underlying market risk. Experienced hedge fund managers tend to consider long and short position integrally, because integrated optimization allows the portfolio to control risks more efficiently. For instance, the renewable energy stocks performances are negative correlated to the traditional coal and oil stocks. By longing one sector while short-selling another, at a limited risk level, investors can pursue higher returns. Main disadvantagesIf the manager wrongly predict directions, the losses could possibly be significant. Risk from long position is limited since the stock prices cannot be under zero; however, risk from short position is sometimes uncontrollable. When losses from short position offset profit from long position, the strategy fails. Considering the efficiency of market, influence of investors behaviours, barriers and conflictions, the real securities prices are quite hard to predict. Stock markets tend to overreact and winner-loser effect widely exists (Debondt and Thaler, 1985). And if a manager predicts and bets long/short directions based on an important event, the portfolio might lose money due to overreaction. If a manager predicts based on current price trend, the portfolio may also lose money in long run due to winner-loser effects.In conclusion, the performance of the first category long/short strategy heavily depend on the selection of stocks and hence the capability of portfolio managers. 2. Simply hedge long positions with ETFs or derivatives to reduce market risk.Managers selects a diversified portfolio of long stocks via fundamental analysis, and then hedge market risk with a synthetic short position, for example long put plus short call (relating stock index options).Main advantagesWhen the short opportunities are limited or short selling is restricted, this technique enables hedge fund manager to construct long/short portfolio. In practice, borrowing certain amount of one specific stock from brokers might be hard and expensive; moreover, in several financial markets (for example China) short-selling is heavily restricted. Given these facts, this strategy exhibits its great advantage that its practicable. And the initial investments of constructing short positions are comparatively low (differences of option premiums).In addition, to hedge out market risk, the direct and efficient way is constructing short position using index options. When the options are in-the-money, the profit from short position is linear to index changes.Main disadvantagesThe short position may involve derivatives, which means the potential loss can be high. Portfolio managers have to control the amount of leverage in the long/short portfolio. Long put plus short call equals to short forwards. When the index rises significantly, considering the leverage, losses from short position is great, which might offset the profit from long position.3. Apply option-writing strategies, and sometimes may not even select stocks.For instance:Long position-holding a full diversified stocks portfolio, or index fund shares;Short position-selling index call options to make profit from the fluctuations in the market; meanwhile, long index put option to hedge the downside risks of market.Main advantagesThis strategy does not require much effort in selecting stocks, and it generates relatively stable profits because much of the profits of this category are gained by collecting option premiums. (Initial investment of the short position above is the put premium mines call premium, which is likely to be greater than zero.) It avoids or significantly reduces the risk of managers misjudgements. Main disadvantagesThe returns of these strategies distribute in a narrow spectrum, and the return level is relatively low. Because when the index goes up, parts of profit from stock market are necessarily offset by loss from option market, and the same scene with the opposite direction. Part2. The process of selecting stocksIn practice, hedge funds long/short managers have distinct stock selecting strategies. Some focus on specific geographic markets; others focus on several sectors they are familiar with. In this coursework, I select my long/short equities according to my analysis on sectors. I select long position stocks from Chinese Health Care Sector and select short stocks from U.S. Bank Sector. Then I would like to discuss the two sectors in detail. 1. Chinese Health Care SectorIn a global scale, health care sector has great value. As the material living standard improving, people have more disposable income and care more about health care services. In recent decades, pharmaceutical companies and medical equipment manufacturers around the world have been earning good profits. Meanwhile, in financial market, health care sector has good performances even in the crisis (betas usually less than 1). Especially, Chinese health care sector exhibits bright perspectives.The reasons are as follows: In China, health care expenditure counted around 4% of GDP, which is far less than 20% in US and other developed countries; Facing serious population aging trend and the influence of one-child policy, Chinas health care expenditure is likely to increase significantly in the next one or two decades; Government has been making great efforts to promote health care services in vast rural area; In urban area, policies about health care insurance have been refined, which is good news for pharmaceutical companies; Chinese people firmly believe in Chinese traditional herb medicines; Often several generations of a family have good impression on the leading pharmaceutical companies that hold precious traditional prescriptions; Threatened by a worldwide outbreak of bird flu, Chinese health care companies are making breakthroughs in vaccine developing and researches; Free cash flows in Chinese health care industry are adequate, and dividends are relatively high; Given these facts, its reasonable to invest in Chinese health care sector.2. U.S. Bank SectorAmerican bank system is highly sophisticated. Top bank corporates have good reputation and global influence. However, some bank corporates performances have long been disappointing. I would like to choose several U.S. banks with poor perspectives to construct my short position.The reasons I short them are as follows: Since the 1970s, business environment of U.S. bank corporates has deteriorated; Because of interest rates liberalization, traditional retail bank business has become less profitable; With the development of financial market, total value of bond market has exceeded that of bank loan; The major clients of U.S. banks have been small enterprises or individuals; Unsuccessful operating strategies could lead to long-term decline in profit, which leads to shrink in stock price and hence market value; Under this circumstance, U.S. bank corporates tend to seek for opportunities in highly risky fields, such as asset securitization and interest rate related derivatives, and external financial liberalization distributed the risks in a worldwide scale; As a result, some U.S. bank corporates with poor risk management systems suffer from great losses from off balance sheet business;Based on what I listed above, its rational to short some U.S. bank stocks with unsatisfied performances. 3. Stock Selection with Bloombergs equity screening toolBasic steps: Login Bloomberg【EQS】 Add criteria Generate resultsoutput-Excel.Long Position CriteriaAnalysis and Explain Sectorshealth careCH EquitySee previous analysis Growth of P/E over 5 yearsLess than Relative SectorCompared with the increase in price, increase in EPS is larger in the past 5 years. And relatively low P/E represents that the stock price has good potential to rise. Its a proper index to distinct the undervalued stocks and overvalued stocks. Growth of Gross Profit over 9 Years, 1 Year agoGreater than Relative SectorThe gross profit margin ratio measures the efficiency that a corporate uses its productive resources, indicating the profitability of a business before overhead expenses.Growth in gross profit is an essential indicator of the firms future development. Dividend Growth over 5 yearsGreater than Relative SectorIt measures the retained earnings and the profitability of a company. Usually, firms with continuous growing dividends are attractive to investors.There are 12 stocks that satisfy all the criteria; consider these corporates reputation and influence, finally I selected 7 of them to construct long position. List of Long StocksTickerShort NameGr PoP of P/E over 5 YearsRelative SectorGr PoP of Gross ProfitRelative SectorDvd Net 5Yr GrRelative Sector000538 CH EquityYUNNAN BAIYAO-A(41.52)58.83758.29349.8742.3710.80600594 CH EquityGUIZHOU YIBAI-A(42.05)58.83747.46349.8714.2910.80002038 CH EquityBEIJING SL-A(43.68)58.831124.01349.8749.6310.80600276 CH EquityJIANGSU HENGRU-A(51.44)58.83689.50349.8717.9310.80600196 CH EquitySHANGHAI FOSUN-A(54.69)58.83586.77349.8725.7910.80600518 CH EquityKANGMEI PHARMA-A(64.55)58.831671.47349.87118.6710.80600216 CH EquityZHEJIANG MEDI-A(92.13)58.83612.89349.8775.5410.80Short Position CriteriaAnalysis and Explain SectorsFinancebankUS EquitySee previous analysis Growth of P/E over 5 yearsGreater than Relative SectorAbnormally high P/E ratio presents the stock is overvalued. Greater growth of P/E shows that the rise of price does not come from the rise of EPS; instead, it comes from investor sentiment or other factors that has few connections with fundamentals. So in long-term price will decline, approaching its intrinsic value.Dividend Growth over 5 yearsLess than Relative SectorFirms with continuous declining dividends are less attractive to investors. Moreover, when the dividend growth is negative, we have reason to quest that the firms financial condition has been deteriorated seriously. Growth of Net Income/Profit over 9 Years, 1 Year agoLess than Relative SectorThe gross profits of bank corporates mainly depend upon interest rates which is an external factor. In this sector, its more reliable to apply Net Income/Profit ratio to measure the profitability and the operating efficiency. There are 17 stocks that satisfy all the criteria; comparing these corporates key financial ratios and searching relative news, I decided 3 of them to construct short position. List of Short StocksTickerShort NameGr PoP of P/E 5YrRelative SectorDvd Net 5Yr GrRelative SectorGr PoP of NI / ProfitRelative SectorCZBS US EquityCITIZENS BANCSHR158.2257.59(15.89)(0.69)(81.29)613.03HWBK US EquityHAWTHORN BANCSHA164.2957.59(22.25)(0.69)(64.70)613.03WVFC US EquityWVS FINL CORP130.2657.59(24.21)(0.69)(58.12)613.03Part3. Fundamental analysis of long/short stocks1. Long stocksFirstly, I collect fundamental data of 16 health care companies (including some of long companies) whose industrial positions and market capitals are similar to the selected long stocks and construct Health Care Industrial Index as a benchmark Constituent stocks of this self-constructed Health Care Industrial Index: 600196 600664 600267 600276 600812 000999 600062 600623 600380 600518 000650 600129 600867 600216 600252 600329. In fundamental analysis part, I will compare the financial data of long stocks with industrial data which is from comprehensive calculation the 16 companies.000538 CH Equity YUNNAN BAIYAO-AYunnan Baiyao started from a Chinese herb medicine store with more than 150 years history. Main products are a series of Yunnan Baiyao powders, capsules, plasters, and aerosols, which are incredible cures to injuries and wounds. Enjoying a great reputation, the prescription of Yunnan Baiyao is a top secret in the industry and is highly protected by the government. In recent years, the YB engages in developing health products consisting of toothpastes, itching-relieving etc., which have become a new profit booster.Liquidity and leverage ratio of YB20032004200520062007200820092010201120122013CASH_RATIO0.570.510.530.620.540.621.130.680.390.390.48QUICK_RATIO0.930.940.880.930.831.051.411.110.981.051.11CUR_RATIO1.731.781.791.771.721.972.302.33TOT_DEBT/TOT_CAP13.5813.8816.9621.9619.0614.0110.147.808.127.386.59Around 2009, liquidity indices and leverage have obvious changes. Since 2010, cash ratio and quick ratio have reduced, whereas current ratio has risen, which is caused by the rise of inventory. Furthermore, total debt/total capital significantly fell in 2009. Company decided to lower its leverage, which is a reaction to the impact of financial crisis.Industrial liquidity ratioAfter financial crisis, health care companies commonly chose to keep more cash, which we can figure out from table. Liquidity indices in this industry climbed from 2009 and slightly fell in 2012.200720082009201020112012cash ratio0.31 0.43 0.60 0.66 0.67 0.58 quick ratio0.85 0.90 1.14 1.21 1.21 1.18 current ratio1.14 1.26 1.56 1.69 1.71 1.66 Compared with industrial data from 2007 to 2012, current ratio of Yunnan Baiyao is much higher, while cash ratio and quick ratio are lower which is also contributed by inventory rises. In medical industry, inventory is an important signal for risk-resistance and companies future development. Profitability and GrowthWith Yunnan Baiyao launching a series of household care products such as Baiyao toothpaste which is proven to be highly popular, sales growth and net income growth improved significantly in 2003. From 2004 to 2012, sales performances fluctuated, and net income growth exhibited three cycles.ROE and EBIT of YBCQ4 2006CQ4 2007CQ4 2008CQ4 2009CQ4 2010CQ4 2011CQ4 2012RETURN_COM_EQY29.47 26.83 20.33 17.97 23.17 24.29 25.13 EBIT_MARGIN10.62 10.60 9.43 9.22 10.21 11.88 13.11 Industrial profitability ratio2007_A2008_A2009_A2010_A2011_A2012 Q12012 Q2Gross Profit34.76 37.41 39.86 37.70 34.28 36.41 36.13 Net Profit13.85 11.73 17.05 13.94 12.61 11.84 11.12 ROA8.63 8.43 11.54 9.60 8.21 2.11 3.90 ROE16.67 14.80 19.36 16.43 14.46 3.72 6.93 Reviewed the industrial data, ROE of YB is high in 2006 to 2012; However, consider EBIT and industrial net profit, it shows that the company faces relatively heavy tax burden and interest burden. Quality of ProfitThe cash flow statements also present there are three business cycles in the recent ten years. 2009 is a special year, and except for this year, the quality of income is high.CQ4 2005CQ4 2006CQ4 2007CQ4 2008CQ4 2009CQ4 2010CQ4 2011CQ4 2012CF_CASH_FROM_OPER130.53139.27(61.43)678.58(587.50)831.91(78.19)348.67CASH_FLOW_TO_NET_INC2.402.14(0.58)4.28(3.04)3.06(0.22)0.76600594 CH Equity GUIZHOU YIBAI-AGuiZhou YiBai Pharmaceutical Co., Ltd. was founded in 1995. Its products, including Anshen syrup, Antelope cold capsules etc., are widely used in healing colds and coughs, dizziness, fever, and sore throat. In addition, it is involved in the manufacture and distribution of raw drug materials. Recently, the company makes effort to explore mechanical products, medical services and capital market investment.Industrial Leverage ratio Leverage of GYGuiZhou YiBai has very low leverage, and hence financial risk is relatively low. After the crisis, the leverage of health care industry fluctuates in a narrow range, from 0.40 to 0.44. And GYs leverage ranges from 0.13 to 0.20.CQ4 200