Hedge Funds

Hedge fund risk and performance are topics that are difficult to talk about with any sort of authority. We all know hedge fund performance claims are inflated—but by how much? It has long been known that hedge fund returns are generally negatively skewed and fat-tailed—but how severe a problem is this, and can it be diversified away? Anyone who attempts to confront these and similar questions must deal with hedge fund index data that is known to be biased—but those biases are difficult to assess.

 

This edited collection delves into these questions. It comprises 29 chapters written by over 50 authors. It isn't an introduction to hedge funds; considerable knowledge is assumed. Instead, it delves into more technical topics that would concern sophisticated investors and especially the consultants who advise them. The unifying theme of the book is the statistical analysis of hedge fund returns. The literature is cited extensively, theory is explained, and extensive statistical analyses of hedge fund index data are presented.

You probably know that hedge fund returns are skewed and leptokurtic, but did you know that these tend to become more extreme when you combine several hedge funds into a portfolio? They also tend to have a disproportionate influence when hedge funds are blended into traditional stock and bond portfolios.

This  is just one of the many insights you will glean from reading this informative book. Sure, the authors promote hedge funds as an asset class—and they seem especially enthusiastic about managed futures—but they are generally balanced in acknowledging issues with hedge fund returns, and especially biases in the hedge fund indexes from which those returns are often calculated.

My one real criticism with the book is that it is too long. Various topics are discussed, but the chapters keep coming back to the same topic of hedge fund performance. There are pages and pages of tabular data. You are going to get bored looking at it all, especially as it starts to become redundant. It would have been nice if the editors had been more aggressive in consolidating similar chapters. The book could easily have been  made a third as long without loosing any information.

Contents

1. Integrating hedge funds into the traditional portfolio

2. Hedge funds from the institutional investor's perspective

3. Funds of hedge funds versus portfolios of hedge funds: a comparative analysis

4. Analyzing style drift in hedge funds

5. Hedge fund allocation under higher moments and illiquidity

6. Revisiting the role of hedge funds in diversified portfolios

7. Hedge fund selection: a synthetic desirability index

8. Hedge fund index tracking

9. Designing a long-term wealth maximization strategy for hedge fund managers

10. Profiles of hedge fund indexes against conventional asset style indexes

11. Applying securitization technology to hedge funds

12. Maximum drawdown distributions with volatility persistence

13. A literature review of hedge fund performance studies

14. Investing in hedge funds through multimanager vehicles

15. Performance in the hedge fund industry: an analysis of short- and long-term persistence

16. Further evidence on hedge fund performance: a calendar-time approach

17. Investing in hedge funds: risks, returns, and performance measurement

18. Efficiency of funds of hedge funds: a data envelopment analysis approach

19. The performance of hedge funds in the presence of errors in variables

20. Alternative RAPMs for alternative investments

21. Volatility regimes and hedge fund management

22. Does extreme risk affect the fund of hedge funds composition?

23. A hedge fund investor's guide to understanding managed futures

24. Fat-tail risk in portfolios of hedge funds and traditional investments

25. Skewing your diversification

26. Investable equity long/short hedge funds: properties and behavior

27. Hedge funds and portfolio optimization: a game of its own?

28. Structured products on fund of fund underlyings

29. Hedge funds and the stale pricing issue

Also, because we know the underlying data is biased in various respects, one might question the validity of employing some of the sophisticated analyses that are used. While the authors honestly acknowledge the issue, there is always an element of "garbage in, garbage out."

Other than that, if you are a researcher, sophisticated investor or consultant, you will find plenty of interesting analyses here. For pure quantitative analysis, this book stands head and shoulders above any other on the topic. [10/16/05]
 

For related books, see sections:

Portfolio Management - Hedge Funds

Portfolio Management - Specialty Strategies

Portfolio Management - General

 

 

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