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Fred Bocock was examining the performance of the Energy Hedge Fund and the Energy Portfolio, a hedge fund and a mutual fund respectively, which he manages. Bocock had become increasingly aware that absolute returns or relative returns (returns relative to a benchmark) may not adequately capture his performance and some measure of risk-adjusted performance was necessary. The Dynamis Energy Hedge Fund extends the discussion of performance evaluation into the hedge fund arena. (See “Zeus Asset Management,” UVA-F-1232, for an examination of performance evaluation techniques in the mutual funds arena.) More broadly, the case engages students in discussions on what hedge funds are, what investment strategies they use, and who their investors are. Since the portfolio manager of Dynamis manages both an oil sector equity mutual fund and an oil sector hedge fund, the case allows for a comparison between a hedge fund and a mutual fund. Students should consider the pros and cons of evaluating the performance of the oil stock mutual fund against a number of oil sector stock indices as well as against a number of generic indices, such as the S&P 500 Index. The use of futures, options, shorts, and leverage by hedge funds makes it a lot more difficult to measure their performance. The case comes with a spreadsheet that contains data on the energy mutual fund, the Dynamis hedge fund, and several relevant indices.

In early January 2008, a senior VP with LAAMCO, a fund of hedge funds known for alternative investments, was conducting due diligence on an equity market-neutral hedge fund. The hedge fund used an option strategy known as a collar (also known as a bull spread or split-strike conversion). The track record of the hedge fund had been stellar. The fund's performance had not only beaten that of the S&P 500 Index over the same period but had done so with much lower monthly return volatility. As part of the due diligence, it was necessary to backtest the collar strategy and try to quantify how much value the manager, BLM Investment Securities, LLC, (BLM) had added. The case is a disguised representation of an actual hedge fund—the true identity of BLM is revealed to students at the end of the case discussion.

Are hedge funds heroes or villains? Management of Blockbuster, Time Warner, Six Flags, Knight-Ridder, and Bally Total Fitness might prefer the “villain” appellation, but Enron, WorldCom, Tyco, and HealthSouth shareholders might view management as the real villains and hedge funds as vehicles to oust incompetent corporate managers before they run companies into the ground or steal them through fraudulent transactions. Could the pressure exerted by activist hedge funds on targeted companies result in increased share prices, management accountability, and better communication with shareholders? Or does it distract management from its primary goal of enhancing long-term shareholder value?

To determine the benefits and disadvantages of activist hedge fund activity from the perspective of corporate management and shareholders; to examine if a hedge fund's suggested corporate restructuring could create greater shareholder value; and to explain the changing roles and perspectives of hedge funds.

Family members knew something was very wrong when Adolf Merckle, who had guided the family holding company, VEM Vermogensverwaltung GmbH, through dozens of successful investments, left the house one afternoon in January 2009 and failed to return. That night their fears were confirmed when a German railway worker located Merckle's body near a commuter train line near his hometown of Blaubeuren, about a hundred miles west of Munich. It was no secret that the recent financial crisis had taken a toll on Merckle's investments. He was known in Germany as a savvy investor, but had lost hundreds of millions of Euros after being caught on the wrong side of a short squeeze of epic proportions involving Volkswagen stock. This was not the only large bet against that company's stock. A number of hedge funds, including Greenlight Capital, SAC Capital, Glenview Capital, Tiger Asia, and Perry Capital, lost billions of Euros in a few hours based on their large short positions in Volkswagen's stock following the news on October 26, 2008, that Porsche AG had obtained a large long synthetic position in Volkswagen stock through cash-settled options. In the next two days, this short squeeze produced a fivefold increase in Volkswagen's share price, as demand for shares from hedge funds exceeded the supply of borrowable shares.

This case focuses on the massive equity derivative positions entered into by Porsche in relation to Volkswagen stock and by TCI and 3G in relation to CSX stock. Students will learn how equity exposure can be created without buying stock and without prior disclosure. The role of regulators, courts, and investment banks that facilitate these transactions is also explored.

Hedge fund Magnetar Capital had returned 25 percent in 2007 with a strategy that posed significantly lower risk to investors than the S&P 500. Magnetar had made more than $1 billion in profit by noticing that the equity tranche of CDOs and CDO-derivative instruments were relatively mispriced. It took advantage of this anomaly by purchasing CDO equity and buying credit default swap (CDS) protection on tranches that were considered less risky. Now it was the job of Alec Litowitz, chairman and chief investment officer, to provide guidance to his team as they planned next year's strategy, evaluate and prioritize their ideas, and generate new ideas of his own. An ocean away, Ron Beller was contemplating some very different issues. Beller's firm, Peloton Partners LLP, had been one of the top-performing hedge funds in 2007, returning in excess of 80 percent. In late January 2008 Beller accepted two prestigious awards at a black-tie EuroHedge ceremony. A month later, his firm was bankrupt. Beller shorted the U.S. housing market before the subprime crisis hit, and was paid handsomely for his bet. After the crisis began, however, he believed that prices for highly rated mortgage securities were being unfairly punished, so he decided to go long AAA-rated securities backed by Alt-A mortgage loans (between prime and subprime), levered 9x. The trade moved against Peloton in a big way on February 14, 2008, causing $17 billion in losses and closure of the firm.

This case analyzes the strategies of the two hedge funds, focusing on how money can be made and lost during a financial crisis. The role of investment banks as lenders to hedge funds such as Peloton is explored, as well as characteristics of the CDO market and an array of both mortgage-related and credit protection-related instruments that were actively used (for better or worse) by hedge funds during the credit crisis of 2007 and 2008.

Within 18 months of exiting bankruptcy, Kmart's position was sufficiently strong to launch an acquisition of Sears, once the nation's largest retailer and also a core holding of ESL. Looks at a number of compelling issues related to Kmart's bankruptcy, restructuring, and rebirth under the control of ESL, a large hedge fund. Presents some of the key metrics that Eddie Lampert, head of ESL, had available to him as he made two decisions: first, in 2002, to amass a controlling stake in Kmart's defaulted debt during the restructuring; and second, in 2004, to launch a takeover of Sears. The first deal illustrates the decision-making process for a financial buyer, including the downside protection of Kmart's real estate holdings, whereas the second deal represents a traditional strategic acquisition. Illustrates the innovative use of real estate as a “hedge” for ESL in the event that the retail combination does not produce the required financial results. Also focuses on the role of investment bankers and the increasingly important position that hedge funds and LBO funds have carved out in the M&A market.

To outline the explosive growth in assets and influence of alternative investment managers, particularly LBO funds and hedge funds, and the transition of some larger hedge funds from shorter term trading strategies to longer term plays on distressed debt, restructurings, and turnarounds.

Alice Handy, an investment professional with 30 years' experience as head of the University of Virginia Investment Management Company, has opened a new asset management firm targeted at midsize endowments and nonprofit institutions in January 2004. Her business, Investure, LLC, offered outsourced investment services to institutions with $150 million to $1 billion in assets and access to top-performing managers at lower cost than a fund of funds (FoF). Smith College, a prestigious liberal arts college with a nearly $1 billion endowment, is interested in increasing its current allocation to private equity. Handy and her partner are preparing to meet with Smith's trustees in an attempt to win Smith College as Investure's first client. The case presents three different approaches to private equity investing: direct investment through a traditional limited partnership, investment through a FoF, or investment through Investure's outsourced model. The class discussion presents an opportunity to evaluate advantages and shortcomings of each approach, introduce key terminology, and discuss the current trends in the private equity market. Students are given the cash inflows and outflows for a representative investment in a venture capital fund of the type Handy hopes to invest in on behalf of Smith College. The main analytical task requires students to evaluate the expected gross and net returns generated by the representative investment under each of the different approaches and fee structures.

This case was written for an early class in courses on entrepreneurial finance, venture capital, or private equity. It can also be used in specialized courses for fund trustees interested in alternative assets.

The case provides an introduction to how currency mismatches create exposures, why and how companies hedge (or do not hedge) those exposures, alternate valuation models and the use of foreign currency convertibles in funding a global expansion program. The case highlights the ambitious growth strategy of Wockhardt, a global biopharmaceutical company. In a bid to dominate the biopharmaceutical market, Wockhardt grew aggressively by acquiring companies all over the world. This expansion was funded by a mix of secured loans (bank borrowings) and unsecured loans including foreign currency (US dollar denominated) convertible bonds (FCCBs). Due to deteriorating business and economic conditions, the company experienced a sharp decline in profitability and stock price resulting in a debt overhang. The company had to restructure its capital structure in March 2009 to escape bankruptcy. Since FCCB holders did not agree to restructure the terms of the instrument, the company had to turn to senior lenders to restructure debt. The company’s management is faced with several options to deal with financial distress. The case asks students to evaluate those options. The case can be used to teach hedging foreign currency exposures, design of capital structure in rapidly evolving industries and dangers of financing R&D intensive ventures with convertible debt denominated in foreign currencies.

The case is based on secondary data sources. Information statements filed with the Securities Exchange Board of India, the company’s website, press releases and security analyst reports formed the basis for this case. Supplementary information was gathered from the CAPITALINE database, and websites of the Bombay Stock Exchange and the National Stock Exchange of India. Sources of information are documented appropriately in the case and teaching note. No names in the case have been disguised. The authors have no personal relationship with the company.

The case is suitable for courses in corporate finance, mergers and acquisitions, international financial management, corporate restructuring and valuation at the graduate level. It can also be used in executive education programs.

The case provides an introduction to how currency mismatches create exposures, why and how companies hedge (or do not hedge) those exposures, alternate valuation models, the use of foreign currency convertibles in funding a global expansion program and the alternatives in corporate restructuring. Suitable references are provided in the teaching note.

This case is used in Darden's course elective, Corporate Financing, and is accompanied by a teaching note for instructors and Excel spreadsheet for students. The Carlyle Group IPO case explores the circumstances leading up to the firm's IPO in May 2012. Over the past 25 years, Carlyle had grown from a fledgling private equity firm to one of the world's largest and most diversified investment firms. Carlyle had prepared extensively for the roadshow; management anticipated some tough questions. Students are asked to evaluate the extent to which Carlyle is undervalued relative to its peers. The case provides information on how to evaluate the earnings received by the public shareholders and outlines several alternative approaches to value PPEs.

This case explores how and why GM became a major user of private equity and hedge fund capital, as well as the risks and rewards of these new relationships. The Cerberus transaction, audacious in both its size and complexity, is explored in detail. What were the alternatives for GM, and what risks and opportunities lay ahead for both parties? This case investigates the benefits, disadvantages, and potential conflicts of interest that evolved as GM's many suppliers increasingly embraced low-cost, nontraditional financing from hedge funds.

To analyze the significant role that private equity and hedge funds play in providing capital to corporations, especially those in distressed industries.