1、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 s

2、trategy 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 li

3、ke 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

4、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 unattracti

5、ve 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

6、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, bec

7、ause integrated optimization allows the portfolio to control risks more efficiently. For instance, the renewable energy stocks ' performancseare negative correlated to the traditional coal and oil stocks 'By. longing one sector while short-selling another, at a limited risk level, investors

8、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 posit

9、ion offset profit fromlong position, thestrategy 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 Th

10、aler, 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 perf

11、ormance 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, a

12、nd 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 pract

13、ice, 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 prAancdtictahbelein.itial investm

14、ents of constructing short positions arecomparatively 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 chan

15、ges.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 l

16、everage, 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 o

17、ptions 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

18、 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 distribu

19、te 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/sho

20、rt 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 Sect

21、or and select short stocks fromU.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 ser

22、vices. 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 performanceseven in the crisis (betas usually less than 1). Especially, Chinese health care sector exhibi

23、ts 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 t

24、o 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

25、 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 develo

26、ping and researches;Free cash flows in Chinese health care industry are adequate, and dividends are relatively high;Given these facts, it' s reasonabtleintoChininvese health care sector.2. U.S. Bank SectorAmerican bank system is highly sophisticated. Top bank corporates have good reputation and

27、global influence. However, some bank corporates' performances lhoanvgebeen disappointing. Iwould 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 deter

28、iorated;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 o

29、perating strategies could lead to long-term decline in profit, which leads toshrink in stock price and hence market value;Un der this circumsta nee, U.S. bank corporates tend to seek for opport un ities in highly risky fields, such as asset securitization and interest rate related derivatives, and e

30、xternal financial liberalization distributed the risks in a worldwide scale;As a result, some U.S. bank corporates with poor risk man ageme nt systems suffer from great losses from off bala nee sheet bus in ess;Based on what I listed above, it ' rational to short some U.S. bank stocks with unsat

31、isfied performa nces.3. Stock Selection with Bloomberg's equity screening toolBasic steps: Logi n Bloomberg【EQS<GO> 】 Add criteriaGen erate results output-Excel.Long Position CriteriaAnalysis and ExplainSectors health careCH EquitySee previous an alysisGrowth of P/E over 5 yearsLess thanRe

32、lative SectorCompared with the in crease in price, in crease in EPS is larger in the past 5 years. And relatively low P/E represents that the stock price has good potential to rise.It ' s a proper index to distinct the undervalued stocks and overvalued stocks.Growth of Gross Profit over 9 Years,

33、 1 Year ago Greater tha nRelative SectorThe gross profit margin ratio measures the efficie ncy that a corporate uses its productive resources, indicating the profitability of a bus in ess before overhead expe nses. Growth in gross profit is an essential indicator of the firm ' s future developme

34、nt.Divide nd Growth over 5 yearsGreater tha nRelative SectorIt measures the retained earnings and the profitability of a compa ny. Usually, firms with con ti nu ous grow ing divide nds are attractive to in vestors.There are 12 stocks that satisfy all the criteria; con sider the se corporates ' r

35、eputati on and in flue nee, fin ally I selected 7 of them to con struct l ong positi on.List of Long StocksTickerShort NameGr PoP ofGr PoP ofGrossProfitRelativeSectorDvd Net5Yr GrRelativeSectorP/E over 5YearsRelativeSector000538 CH EquityYUNNAN BAIYAO-A(41.52)58.83758.29349.8742.3710.80600594 CH Equ

36、ityGUIZHOU YIBAI-A(42.05)58.83747.46349.8714.2910.80002038 CH EquityBEIJING SL-A(43.68)58.831124.01349.8749.6310.80600276 CH EquityJIANGSU HENGRU-A(51.44)58.83689.50349.8717.9310.80600196 CH EquitySHANGHAI FOSUN-A(54.69)58.83586.77349.8725.7910.80600518 CH EquityKANGMEI PHARMA-A(64.55)58.831671.4734

37、9.87118.6710.80600216 CH EquityZHEJIANG MEDI-A(92.13)58.83612.89349.8775.5410.80Short Position CriteriaAnalysis and ExplainSectors Finan ce bankUS EquitySee previous an alysisGrowth of P/E over 5 yearsGreater tha nRelative SectorAbnormallyhigh P/E ratio presents the stock isovervalued. Greater growt

38、h of P/E shows that the rise of price does not come from the rise of EPS; in stead, it comes from in vestor sen time nt or other factors that has few connections with fun dame ntals. So in Ion g-term price will decli ne, approachi ng its intrin sic value.Divide nd Growth over 5 yearsLess thanRelativ

39、e SectorFirms with con ti nu ous decli ning divide nds are less attractive to in vestors. Moreover, whe n the divide nd growth is negative, we have reason to quest that the firm 's financial condition has been deteriorated seriously.Growth of Net In come/Profit over 9 Years, 1 Year ago Less than

40、Relative SectorThe gross profits of bank corporates mainly depe nd upon interest rates which is an external factor. In this sector, it more reliable to apply Net In come/Profit ratio to measure the profitability and the operating efficiency.'sThere are 17 stocks that satisfy all the criteria; co

41、mparing these corporates key'financial ratios and search ing relative n ews, I decided 3 of them to con struct short positi on.List of Short StocksTickerShort NameGr PoP ofP/E 5YrRelativeSectorDvd Net5Yr GrRelativeSectorGr PoP ofNI / ProfitRelativeSectorCZBS US EquityCITIZENS BANCSHR158.2257.59(

42、15.89)(0.69)(81.29)613.03HWBK US EquityHAWTHORN BANCSHA164.2957.59(22.25)(0.69)(64.70)613.03WVFC US EquityWVS FINL CORP130.2657.59(24.21)(0.69)(58.12)613.03Part3. Fundamental analysis of long/short stocks1. Long stocksFirstly, I collect fun dame ntal data of 16 health care compa nies (in clud ing so

43、me of long compa ni es) whose in dustrial positi ons and market capitals are similar to the selected long stocks and con struct1Health Care In dustrial In dex as a ben chmark . In fun dame ntal an alysis part, I will compare the finan cial data of long stocks with in dustrial data which is from comp

44、rehe nsive calculati on the 16 compa ni es.000538 CH Equity YUNNAN BAIYAO-AYunnan Baiyao started from a Chin ese herb medici ne store with more tha n 150 years history. Main products are a series of Yunnan Baiyao powders, capsules, plasters, and aerosols, which are in credible cures to injuries an d

45、 woun ds. Enjoying a great reputati on, the prescripti on of YunnanConstituent 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 in dustry and is

46、highly protected by the gover nmen t. I n rece nt years, the YB en gages in develop ing health products con sist ing of toothpastes, itch in g-reliev ing etc., which have become a new profit booster.Liquidity and leverage ratio of YB20032004200520062007200820092010201120122013CASH_RATIO0.570.510.530

47、.620.540.621.130.680.390.390.48QUICK_RATIO0.930.940.880.930.831.051.411.110.981.051.11CUR_RATIO1.731.781.791.771.721.972.302.33TOT DEBT/TOT CAP13.5813.8816.9621.9619.0614.0110.147.808.127.386.59Around 2009, liquidity in dices and leverage have obvious cha nges. Since 2010, cash ratio and

48、 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.In dustrial liquidity ratioAfter financ

49、ial crisis, health care companies commonly chose to keep more cash, which we can figure out from table. Liquidityindices in this industry climbed from 2009 and slightly fell in 2012.200720082009201020112012cash ratio0.310.430.600.660.670.58quick ratio0.850.9011.18current ratio1.141.261.56

50、1.691.711.66Compared with in dustrial data from 2007 to 2012, curre nt ratio of Yunnan Baiyao is much higher, while cash ratio and quick ratio are lower which is also con tributed by inven tory rises. In medical industry, inventory is an important signal for risk-resistanee and companies 'uture

51、development.Profitability and GrowthWith Yunnan Baiyao launching a series of household care products such as Baiyao toothpaste which is proven to be highlypopular, sales growth and net income growth improved significantly in 2003. From 2004 to 2012, sales performances fluctuated,and net income growt

52、h exhibited three cycles.OOCl S3& cr Fq uity YU NNAh BA IYAC- A=7 Is r-lw Etn Emr EC口 耳 § =Ksc w r-ipr 口一rr i 2舄§ Ita-w 80qke 8a Gms旨 Asr 目 ffsnnr E-nf口 EnDrnMs h-QH§ b-£m §8U £或§ 匚r:一 sr冒 3Sso xnr 30 ucure口ROE and EBIT of YBCQ4 2006 CQ4 2007 CQ4 2008 CQ4 2009

53、CQ4 2010 CQ4 2011 CQ4 2012RETURN_COM_EQY29.4726.8320.3317.9723.1724.2925.13EBIT_MARGIN10.6210.609.439.2210.2111.8813.11In dustrial profitability ratio2007_A2008_A2009_A2010_A2011_A2012 Q12012 Q2Gross Profit34.7637.4139.8637.7034.2836.4136.13Net Profit13.8511.7317.0513.9412.6111.8411.12ROA8.638.4311.

54、549.600ROE16.6714.8019.3616.4314.463.726.93Reviewed the in dustrial data, ROE of YB is high in 2006 to 2012; However, con sider EBIT and in dustrial net profit, it shows that the compa ny faces relatively heavy tax burde n and in terest burde n.Quality of ProfitThe cash flow statements al

55、so 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.CQ42005CQ42006CQ42007CQ42008CQ42009CQ42010CQ42011CQ42012CF_CASH_FROM_OPER130.53139.27(61.43)678.58(587.50)831.91(78.19)348.67CASH_FLOW_TO_NET_INC2.402.14

56、(0.58)4.28(3.04)3.06(0.22)0.76600594 CH Equity GUIZHOU YIBAI-AGuiZhou YiBai Pharmaceutical Co., Ltd. was foun ded in 1995. Its products, in cludi ng An she n syrup, An telope cold capsules etc., are widely used in heali ng colds and coughs, dizz in ess, fever, and sore throat. In addition, it is involved in the manufacture and distribution of raw drug materials. Recen tly, the compa ny makes effort to explore mecha ni cal products, medical services and capital market in vestme nt.In dustrial Leverage ratioHealth Care Industr