__Courses:__- Hedge Funds (Spring Semester 2014)

- Advanced Asset Pricing (Summer Term 2014)

__Courses description and details:__

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**Hedge Funds (**

**Spring Semester 2014)**

Objectives of the Course:

This course will present the main strategies used by hedge funds, analyze their risk-

return trade-os and assess their ability to generate positive performance (alpha).

We will also review the institutional, organizational and competitive characteristics

of the hedge fund industry. The course will draw on the most recent academic

research on hedge funds and its relation to industry practice. Additional topics

include the role of hedge funds as liquidity providers, hedge fund replication and the

impact of hedge funds on nancial market stability. Finally, one (or more) industry

professionals will share their insights into real world hedge fund investing.

Course Outline:

Week 1 - An Introduction to Hedge Funds:

a) Denition(s) of a hedge fund

b) Presentation of market participants in the hedge fund industry

c) Growth and change of total hedge fund assets and strategy assets

d) Sources and limitations of hedge fund return data

e) Hedge fund marketing claims versus research evidence

Weeks 2 & 3 - Hedge fund strategies:

a) Hedge fund strategy classications are dened by the industry and are not standardized

b) Brief presentation of the vanilla forms of popular strategies (long short equity, global macro,

xed income arbitrage, distressed securities, and others)

c) Detailed presentation of trend following and convertible bond arbitrage

Weeks 4 & 5 - Identifying (priced) hedge fund risk factors - theory:

a) Traditional risk factors - linear & nonlinear (options)

b) Recently proposed risk factors (unexpected changes in volatility, unexpected changes in liq-

uidity, ambiguity risk)

c) Replicating hedge fund strategies with liquid securities to understand risk factors (trend fol-

lowing and contrarian trading)

d) Proposed consensus risk factor models

e) How many hedge funds are needed to fully diversify a portfolio?

Weeks 6 & 7 - Performance of hedge funds - empirical:

a) Hedge fund alphas from risk adjusting with consensus risk factor models

b) Does a liquidity risk factor eliminate all other risk factors?

c) Luck versus skill

d) Are alphas predictable?

e) Do measured alphas include omitted risk premia?

Week 8 - Sources and limits of hedge fund performance:

a) Superior investment skills

b) Less regulatory constraints & exibility

c) Economies of scale

d) Liquidity rents

e) Insider trading

f) Limits to arbitrage

f) Competition from bank proprietary trading desks

Week 9 - Replicating hedge funds returns with liquid securities for investors:

a) Linear hedge fund replication

b) Other replicating techniques

Week 10 - Analyzing hedge funds flows:

a) Flows, performance, and managerial incentives in hedge funds

b) Performance, risk, and capital formation

Weeks 11 & 12 - Do hedge funds destabilize nancial markets?:

a) Hedge funds during nancial crises

b) The LTCM case

c) What Happened to the Quants in 2007?

d) Measuring contagion in the hedge fund industry

e) Shareholder activism

Week 13 - Fund of Hedge Funds:

a) Dr. Nils Tuchschmid presents selected topics on professionally managed portfolios of hedge

funds

Organization of the Course:

Each class will consist of lectures and class room discussions drawing on recent aca-

demic articles. All academic articles will be available to download at chamilo.unige.ch.

Only some of these articles will be required reading and these will be listed sepa-

rately. We will occasionally devote a small part of class time to discuss progress on

the required short research paper (see below) as well as topics for Master theses.

Active class participation will be encouraged, based on required readings. The

nal grade will be based on a short (5 page) research paper (30%) and a written

examination (70%).

Optional Textbooks:

Francois-Serge Lhabitant (2007), "Handbook of hedge funds", John Wiley

Andrew W. Lo (2010), "Hedge Funds: An Analytic Perspective (Revised and Ex-

panded Edition)", Princeton University Press

Bibliography:

Week 1

- Handbook of Hedge Funds, Francois-Serge Lhabitant, Wiley, 2007

- chapters 1-5

Week 2

- Handbook of Hedge Funds, Francois-Serge Lhabitant, Wiley, 2007

- chapters 6-16

Week 3

- Fung, William, and David A. Hsieh., \The risk in hedge fund

strategies: theory and evidence from trend followers.", Review of

Financial Studies, Volume 14, Issue 2, 2001, pages 313-341

- Agarwal, Fung, Loond & Naik, \Risk and return in convertible

arbitrage: Evidence from the convertible bond market", Journal

of Empirical Finance, Volume 18, Issue 2, 2011, pages 175-194

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**Advanced Asset Pricing (Summer Term 2014)**

Objectives of the Course:

This Master’s Course focuses primarily on theoretical and empirical developments in continuous-

time asset pricing and Portfolio Management. The first part of the course focuses on

continuous-time optimal consumption and portfolio choice models as well as on continuous-

time asset pricing models. The second part of the course is dedicated to selected research

topics in asset pricing and portfolio management that shall also be of interest to students

searching for a master’s thesis research topic.

Course Outline:

The course will be structured into an introductory session and 6 main chapters covering the

following topics:

Introduction

1. Review of the static portfolio choice and asset pricing models

This review chapter is based on the e-learning course financial markets (www.financial-

markets.ch) and will cover about 10 modules. The e-learning course is optional and

consists of a self-taught part of the lecture that will not be subject to regular class

room sessions. The material covered in the e-learning course is a pre-requisite for the

subsequent chapters.

2. Portfolio and consumption choices in continuous-time

– The case of a constant investment opportunity set

– The case of a stochastic investment opportunity set

– Strategic asset allocation and the role of the investment horizon

3. Equilibrium asset pricing models and empirical evidence

– The intertemporal capital asset pricing model (ICAPM)

– The consumption capital asset pricing model (CCAPM)

– Habit formation

– The equity premium puzzle

– Empirical evidence on asset pricing models

4. Introducing market imperfections and non-separable preferences

– Asset allocation under transaction costs

– Asset allocation under parameter uncertainty and the role of learning

– Optimal portfolio choices under non-separable preferences

5. Credit risk and the pricing of credit sensitive claims

– Ratings based models

– Market based credit risk models

– Applications

6. Further selected research topics

– Portfolio management

– Liquidity and high frequency trading

– The 2007-2009 financial crisis

This sixth chapter will be conducted in parallel as the third hour of each class. For this

part of the class, each group of students will be asked to make an oral presentation of an

academic paper focusing on one of the above listed topics.

Organization of the course:

Each class will consist partly of lectures covering the five first chapters and partly of class

room discussions of academic articles devoted to the selected topics in chapter 6.

The lectures will be based on teaching notes and on recommended readings from academic

journals and textbooks. There will be exercise sessions as well.

Active class participation will be encouraged and will thus imply that required readings be

done in advance. We will also devote some time to discuss relevant research papers as well

as ideas for Master thesis research papers in the field of continuous-time asset pricing and

portfolio management.

The final grade is based on an oral paper presentation, homeworks and on a final written ex-

amination. The homeworks and oral presentation account for 50%, and the final examination

for 50% of the final grade.

References:

[1] J. Campbell and L.M. Viceira. Strategic Asset Allocation. Oxford University Press, 2002.

[2] J. Cochrane. Asset Pricing. Princeton University Press, 2001.

[3] D. Cossin and H. Pirotte. Advanced Credit Risk Analysis: Financial Approaches and

Mathematical Models to Assess, Price and Manage Credit Risk. Wiley, 2001.

[4] D. Duffie. Dynamic Asset Pricing Theory. Princeton University Press, third edition,

2001.

[5] C.F. Huang and R. Litzenberger. Foundations of Financial Economics. Prentice-Hall,

1988.

[6] J.E. Ingersoll. Theory of Financial Decision Making. Rowman and Littlefield, 1987.

[7] I. Karatzas. Lectures on the Mathematics of Finance. CRM Monograph Series, 1996.

[8] I. Karatzas and S. Shreve. Brownian Motion and Stochastic Calculus. Springer Verlag,

1992.

[9] I. Karatzas and S. Shreve. Methods of Mathematical Finance. Springer Verlag, 1992.

[10] R.C. Merton. Continuous-Time Finance. Basil Blackwell, 1992.

[11] A. Meucci. Risk and Asset Allocation. Springer Verlag, 2005.

[12] F. Quittard-Pinon. March´es des Capitaux et Th´eorie Financi`ere. Gestion Politique

G´en´erale, Economica, third edition, 2003.

[2] is mainly in discrete time with a strong emphasis on pricing kernels and empirical asset

pricing. [5] is essential if you are not familiar with the basics of financial economics and

discrete-time asset pricing. [4] is a very good, but rather concise and formal reference. A

classic book for an introduction to PhD level finance theory is [6] - quite comprehensive and

relevant for the course. [10] is essential for the first and second parts of the course. [7], [8],

and [9] are mathematical references you may wish to consult.