Author Horwitz is
an employee of Kenmar Global Investment Management, a fund of hedge funds. The
firm has implemented a standardized reporting system for hedge funds. Designed
to improve hedge fund transparency, the system is delivered through Bloomberg
terminals. I suppose this book, written by an employee of Kenmar and published
by Bloomberg, is intended to promote the new system. Fortunately, only one
chapter of the book focuses on the system. The rest of the book is a primer on
hedge fund investing targeted primarily to would-be investors.
The book is VERY
elementary. The opening four chapters offer intuitive explanations or what
"volatility", "diversification", "leverage" and "illiquidity" mean. These will
appeal to readers with no prior knowledge of investment concepts, but no one
else. The only formula I found in the entire book is:
1 + 1 = 1.41
which is the
author's cute way of explaining diversification. Needless to say, he has a knack
for simplifying complex ideas. In too many cases, I feel he oversimplifies.
The author is an
unabashed promoter of hedge funds. His enthusiasm bubbles through the pages of
the book, uncritically accepting that hedge funds generate positive alpha. He
dismisses CAPM for being inconsistent with this conclusion. His lengthy list of
factors that permit hedge funds to outperform include leverage, convexity and
"nimbleness." Forty year of scholarly research is shoved overboard ...
Contents
The components of risk
1. Volatility
2. Diversification
3. Leverage
4. Illiquidity
Market risk management
5. Measuring risk
6. Understanding the source of risk
7. Risk visualization and articulation
8. Risk culture
Other risk processes
9. Non-market risk management
10. Constructing a fund
11. Performance attribution
12. Risk budgeting
Risk from the investor's viewpoint
13. NAV/return reporting
14. Constructing a portfolio of funds
15. Risk due diligence
16. Transparency
The solution
17. Industry standard solution
18. The risk fundamentals solution
19. Summary
Much of the book
covers standard topics from investment management: risk measurement, performance
attribution, risk budgeting, etc. If you already know anything about these
topics, you won't find the discussions informative.
Closing chapters
take up the issues of NAV reporting, selecting hedge funds and transparency. A
lengthy closing chapter (about a quarter of the book) describes Kenmar's Risk
Fundamentals reporting system.
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