Could someone give me a quick and dirty answer on why doing a valuation for (example) a potential m&a target and potential hedge fund investment have such different necessities for complex math? More specifically, why do hedge funds and such use complex math and IBD uses middle school math? What behavior in HF investments warrant time series, stochastic modeling, LA, etc? Sorry if this question is worded poorly. Thanks,
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i'm sure a hedge fund employing fundamental strategies uses a lot more of (but obviously not just) that "middle school math" that you talk about.
different strategies represent different beliefs in where value (and expertise) lies i guess. i can, essentially, buy a company and change it fundamentally to create value. or i can discern value through some ridiculous covariance matrix that involves 20 macroeconomic factors that span across the globe. i don't know. but i do know that people have made money following each strategy.
as far as your "quick and dirty answer" goes, i'm sure someone can also comment intelligently on the self-fulfilling nature of some advisory activities, no matter how brief their effects are.
As a disclaimer, I'm not in the industry, but I think hf's use advanced math for high frequency strategies more so than for equity long/short.
main reason a fundamental l/s would use "advanced" math would be for forward forecasting - ie, what is the effect of a decline in GDP on beer sales in Latvia? Banks don't use this because it's not what they get paid to do
I understand that at face value. But just thinking about that objectively, wouldn't I need that info in either circumstance (forward forecasting or potential company acquisition)? If I'm a beer conglomerate & want buy a Latvian brewery wouldn't I want to know that forecast? I know the answer is yes (NPV), but why is a m&a's model so much less mathematically complicated?
Because the bank doesn't have money riding on the deal, and they have access to management's internal projections - yeah, you don't necessarily accept those at face value, but you're not going to go out and construct a model of the global economy either to stress-test them
Banks will simply change numbers if a model doesn't work; you'll never see a hedge fund (or anyone who actually has money on a deal) do that
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