Project 3: A New Hedge Fund

Biases in investment decisions as well as corporate decisions can

potentially generate inefficiencies in market prices. Equity analysts

and other market participants may even exacerbate these effects. Can

“smart” investors identify and exploit short-term inefficiencies in the

market? The goal of this project is to help you develop at least one

concrete idea for starting a hedge fund.

You should provide a short report (not more than 5 pages, doublespaced)

developed around the following topics:

1. What is the main idea and why do you expect the idea to work?

2. Please explain the trading strategies clearly. In particular, please

outline the portfolio construction and rebalancing procedure.

3. What factors generate the inefficiencies you are trying to exploit

and why do they persist? How long do the inefficiencies persist and

why?

4. Why have other smart investors not yet exploited the opportunity?

What types of risks and constraints do they face that may prevent

them from successfully exploiting the opportunity?

5. Would common investors be able to exploit this opportunity? Why or

why not?

Bonus Questions: (PLEASE COMPLETE)

6. Provide some evidence (even anecdotal) to show that the strategy

“works”.

7. Obtain data and perform empirical analysis on your own to

demonstrate that the trading strategy yields superior performance.