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

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 world's 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’ performance s 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 it’s 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, China’s 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, it’s reasonable to inves t 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 toshrink 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, it’s rational to short some U.S. bank stocks with unsatisfied performances.3.Stock Selection with Bloomberg's equity screening toolBasic steps: Login Bloomberg→【EQS<GO>】→ Add criteria→ Generate results→output--Excel.There are 12 stocks that satisfy all the criteria; consider the se corporates’ reputation and influence, finally I selected 7 of them to construct long position.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.Part3. 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 benchmark1. 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 Y unnan Baiyao powders, capsules, plasters, and aerosols, which are incredible cures to injuries and wounds. Enjoying a great reputation, the prescription of Yunnan1Constituent 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.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 YB2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013QUICK_RATIO 0.93 0.94 0.88 0.93 0.83 1.05 1.41 1.11 0.98 1.05 1.11 CUR_RATIO 1.73 1.78 1.79 1.77 1.72 1.97 2.24 2.14 2.07 2.30 2.33 TOT_DEBT/TOT_CAP 13.58 13.88 16.96 21.96 19.06 14.01 10.14 7.80 8.12 7.38 6.59Around 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.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 Y unnan 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 2006 CQ4 2007 CQ4 2008 CQ4 2009 CQ4 2010 CQ4 2011 CQ4 2012EBIT_MARGIN 10.62 10.60 9.43 9.22 10.21 11.88 13.11industrial 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 forthis year, the quality of income is high.CQ4 2005 CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CASH_FLOW_TO_NET_INC 2.40 2.14(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 ratioLeverage 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 GY’s leverage ranges from 0.13 to 0.20.CQ4 CQ4 CQ4 CQ4 CQ4 CQ4 CQ4 CQ42005 2006 2007 2008 2009 2010 2011 2012TOT_DEBT_TO_TOT_ASSET 26.94 35.32 27.41 20.98 20.34 19.21 13.85 13.48Sales and Profitability of GYIn 2006 and 2007, there is a dramatic rocket in net income growth which is not supported by great changes in sales. This abnormal jump comes from M&A. Starting from 2006, GY conducted a series of M&A most of which proven unsuccessful in later year. Experience low tide period in 2008 and 2009, GY’s sales performance has been flat in the recent five years. Fluctuations of net income usually are caused by the poor operations of its sub companies.Profitability and BurdenCQ4 2006 CQ4 2007 CQ4 2008 CQ4 2009 CQ4 2010 CQ4 2011 CQ4 2012TAX_BURDEN 100.31 84.71 84.18 84.10 92.64 81.67 82.51 INT_BURDEN 109.34 99.46 76.61 84.82 87.86 96.68 99.61 EBIT_MARGIN (17.16)11.07 13.35 13.22 16.58 17.90 18.26 Except for 2006, ROE of GY is above industrial level, and EBIT margin is comparatively high, which contributed by the profit generated from investing activities. Tax burden is on an average level while interest burden is not very high.Quality of ProfitCQ4 2004 CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CF _INV_ACT (13.14)(8.10)(8.26)(10.60)(39.46)(11.90)(3.03)(65.04)(546.7) CF _FNC_ACT (3.57)101.17 (94.03)(6.11)71.64 (63.25)(53.75)(35.55)74.89 Free Cash Flow (27.05)(48.72)0.82 36.60 26.17 31.09 10.13 44.74 (95.75)Annual cash flow statements report positive cash flow in most years. But when closely examined quarter financial reports, I find that usually cash flows from operation are negative. There is a probability that GY uses various methods to adjust its cash flow before the disclosure of annual reports. The data of free cash flow is also not convincing.In conclusion, GY is not an ideal company to invest in long-term. Growth of sales and net income are not robust; high ROE and EBIT are driven by M&A and investment activities rather than operating activities; cash flow is not reliable and thus the quality of earning is questionable.002038 CH Equity BEIJING SL-ABeijing SL Pharmaceutical Co., Ltd. develops, manufactures and markets genetic engineering drugs, biological drugs, chemical drugs and medicine preparations.Growth of Sales and Net Income Beijing SLROA and ROE of Beijing SLQ4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012RETURN_COM_EQY 11.21 8.67 6.28 4.87 3.95 2.84 2.27•2006-2010, sales and net profit increased consistently;•2010-2012, sales boosted sharply while net income fell slightly;•During the past seven years, ROA and ROE kept declining;•ROA and ROE are significantly below the industrial average;•Leverage of Beijing SL is very low (values of ROA is very slightly less than values of ROE). Analysis of financial conditions shows that SL has applied good strategies in operation, which lead to an upward trend in business performance; however, sub companies have disappointing performances in recent years, which is the main cause of the decline in ROA and ROE.600276 CH Equity JIANGSU HENGRU-AJH attracts attention in the past a few years because of its global strategy and anti-cancer research.Main Financial Data of JHCQ4 2003 CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012NET_INC_GROWTH 94.23 (3.33) 1.26 56.55 226.52 (10.22)30.00 (16.60)27.34 33.27 RETURN_COM_EQY 12.69 16.07 N/A 28.77 23.29 28.93 24.16 23.03 22.83 N/A EBIT_MARGIN N/A N/A N/A 18.49 26.06 23.07 22.68 22.69 24.04 N/A DEBT_TO _ASSET 28.16 7.56 3.84 3.29 5.51 0.34 0.33 0.51 0.42 0.17 CF_CASH_FROM_OPER N/A N/A N/A 75.80 (63.75)23.63 61.20 115.46 94.56 280.70•Sales and net income growth fluctuated intensively compared with the industrial average; •ROA and ROE continuously creep up since 2003;•ROE and EBIT after 2007 are largely higher than the industrial level;•Leverage of JH has been going down steadily from 2003 to 2012;•Debt to Asset ratio largely decreased in 2008;•Cash flow from operating activities and free cash flow have been sufficient since 2008;In conclusion, JH is a valuable company with good fundamental. It’s rational to hold it when the P/E ratio is relatively low.600196 CH Equity SHANGHAI FOSUN-AMain Financial Data of SFCQ4 2003 CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012NET_INC_GROWTH (67.83)175.01 N/A N/A 387.54 (76.08)243.41 (55.29)(21.95)380.00 DEBT_TO_ASSET 35.78 29.10 32.85 32.34 32.14 22.86 25.16 27.86 28.20 20.71 CF_ OPER (103.40)71.80 67.74 160.78 32.79 206.63 238.64 142.76 111.04 17.66•Growth of sales and net income fluctuates intensively in the observation period;•Since Q3 2009 sales growth are positive;•Net income Growth exhibits highly instability;•Debt to asset ratio of SF is very high;•Cash flows from operating activities are adequate, whereas cash flows from financing are usually negative, which lead to a tight free cash flow;•In certain degree, SF can be regarded as a financial constrained company.ROE, EBIT and Interest Burden of SFROE increases continuously and is approaching the industrial average; EBITs are far behind the industrial level, and interestburden is abnormally heavy, which lead to a low net income level.CQ4 2003 CQ32005CQ42005CQ12006CQ22006CQ32006CQ42006CQ12007CQ42010CQ42011CQ42012CQ12013CQ22013CQ32013INT_BURDEN 531.90 183.14 186.18 173.51 221.94 320.38 352.05 398.48 N/A N/A N/A N/A 347.79 309.37According to financial statements analysis, fundamental of SF is not very satisfying. Expected P/E ratio should not be too high although SF is always popular in stock market.600518 CH Equity KANGMEI PHARMA-AIn past five year, KP actively promotes the hospital pharmacy trust business, which is financially safe and stably profitable. Additionally, KP invests large amount of fund in the construction of medicine basements. Its perspective heavily depends on profitability of the news medical services business and new basements in northern China.Growth and Profitability of KPCQ4 2003 CQ42004CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012NET_INC_GROWTH 116.13 28.34 (6.01)31.58 213.86 41.63 61.39 35.07 49.27 19.39•Sales have been growing dramatically since 2008, and accordingly, net income growth rates are very high;•Gross margins are slightly below the industrial level;•From 2007 to 2012, EBITs are around 20%, which are relatively high in the industry;Debt and Interest Burden of KPDebt to asset ratio is significantly above the industrial levelCQ3 2003 CQ32004CQ32005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012INT_BURDEN N/A N/A N/A N/A 104.75 101.59 97.15 97.62 91.04 86.24Cash Flows of KPCash flows from operating activities are sufficient; however because of the large amount of investment, free cash flows arebasically negative.CQ4 2007 CQ4 2008 CQ4 2009 CQ4 2010 CQ4 2011 CQ4 2012CASH_FLOW_TO_NET_INC 1.25 (0.89)0.03 1.11 0.77 (0.43)A good portion of KP's shares are held by Treasury Social Insurance Fund. From the fundamental data, we can see its value in the next a few years.600216 CH Equity ZHEJIANG MEDI-ADuring 2011 to 2013, operating performances of ZM are not very satisfying. Due to decline in the price of vitamin and VE, profitability of ZM has been consistently falling. But the strategy that participating in bio-pharmacy manufacture is a hope for the company's booming.•Net income growth bias intensively in the past ten years;•In the past five years, net income growth is usually negative;•From 2008 to 2011, ROE are greatly higher than industrial level, and then profitability continuously fell down after 2011;•Before 2009, debt to asset ratio is abnormally high (over 50%);•Cash flow from operating activities gradually grows to be adequate since 2008.2.Short stocksCZBS US Equity, HWBK US Equity and WVFC US Equity share some common features in internal financial condition:•Revenue Growth keeps negative, intensive bias in net income growth;•Asset, loans and deposit usually present negative growth;•Cash flow growths in recent several years are negative.These features represent that profitability of the three bank corporates are instable, which has a negative impact on their basic value.Part4. Portfolio evaluationBased on fundamental analysis from 2003 to 2013, I construct long/short equity portfolio in three time period. In the beginning of each period, I decide the weight of each stock and the net exposure.Assumptions:•Max initial investment in Chinese market is 1,000,000 CNY;•Initial investment in US market is zero—borrowing stocks from brokers;•Annual interest rate of borrowing stocks is 10% of the stock’s initial market value; •Transaction cost and portfolio management fee is 5% of the total profit.1.Portfolio A--01/01/2007 to31/12/2008Profit / loss from long position (USD)=(1264265/6.8345)-(691480/7.8075)= 96,416.68Profit / loss from short position (USD) =207153.5-137380.00= 69,773.50Interest of borrowing stocks= 207153.5*10%*2=41,430.7Total profit=96,416.68+69,773.50-41,430.7= 124,759.48Return of portfolio (annual) = 124,759.48*(1-5%)/ (691480/7.8075)]/2= 66.91%2.Portfolio B—01/01/2009 to 30/12/2011Profit / loss from long position (USD) =135174.0046Profit / loss from short position (USD) = 4018.2Interest of borrowing stocks=13183.5Total profit=126008.7046Return of portfolio (annual) =36.20%Part5. Summery and discussionTo conduct successful long/short strategy, it’s essential to collect information from all aspects. Macro-economy, industrial financial conditions and specific events all have great impacts on the performance of long/short strategy. Stock selecting and fundamental analysis are important. According to the changes of economic climate and other factors, long/short portfolios have to be rebalanced dynamically, which will lead to extra transaction costs. Hedge fund managers should consider the behaviours of investors and frictions in the highly complicated financial market.。