Construction and Analysis of Small-Cap Hedge Funds Based on Relative Value Hedging Strategies

Jianheng Liu

doi:10.54254/2754-1169/64/20231553

Research Article

Open access

Published on 28 December 2023

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Liu,J. (2023). Construction and Analysis of Small-Cap Hedge Funds Based on Relative Value Hedging Strategies. Advances in Economics, Management and Political Sciences,64,288-293.

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Construction and Analysis of Small-Cap Hedge Funds Based on Relative Value Hedging Strategies

Jianheng Liu *^,1,

¹ Harbin Institute of Technology

* Author to whom correspondence should be addressed.

https://doi.org/10.54254/2754-1169/64/20231553

Abstract

In the realm of hedge fund construction, the relative value hedging strategy stands as a prominent method, distinguished by its robust quantification. Its chief advantage lies in its resilience against the general fluctuations of the market. This study aims to demonstrate the efficacy of the relative value hedging strategy by constructing a short-term hedge fund based on this approach. Focusing on companies closely tied to the artificial intelligence industry, namely NVDA, GOOGL, MSFT, and TSLA, the fund designs its investment portfolio. A meticulous comparison of their price-to-earnings ratios with the industry's overall price-to-earnings ratio leads to a long position in GOOGL and MSFT, while NVDA and TSLA are shorted. With a starting budget of $100,000, the fund employs a risk parity strategy to formulate its investment portfolio. In a bid to solidify the positive impact of the relative value hedging strategy on fund design, this paper conducted a backtest in 2019 using Stata. When juxtaposed with the S&P 500 index, the results reveal a marked improvement in key indicators such as return rate, income, and success rate. This empirical evidence underscores the capacity of the relative value hedging strategy to enhance profitability and risk management. It also underscores the potential of this strategy for small investors, affirming its feasibility and value.

Keywords

relative value, hedge fund, pure alpha fund, risk management

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Cite this article

Liu,J. (2023). Construction and Analysis of Small-Cap Hedge Funds Based on Relative Value Hedging Strategies. Advances in Economics, Management and Political Sciences,64,288-293.

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The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2nd International Conference on Financial Technology and Business Analysis

Conference website: https://2023.icftba.org/

ISBN：978-1-83558-229-9(Print) / 978-1-83558-230-5(Online)

Conference date: 8 November 2023

Editor：Javier Cifuentes-Faura

Series: Advances in Economics, Management and Political Sciences

Volume number: Vol.64

ISSN：2754-1169(Print) / 2754-1177(Online)

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