Absolute Returns
Risks and Opportunities of Hedge Fund Investing
"The first rule of
investment is don't lose. And the second rule of investment is don't forget the
first rule. And that's all the rules there are."
Benjamin Graham's rules are just one of the
industry witticisms that populate this book on hedge funds by Alexander Ineichen.
The book stands out for two reasons, one good and the other not so good.
On the not so good side, the book has a tone not
unlike that of a failed used car salesman turned stockbroker. Ineichen suggests there are two types of investors:
pioneers and lemmings. To avoid being lemmings, I suppose we all better hurry up
and invest in hedge funds. That is the tone of this book.
On the good side,
the book is a window on the real world of hedge funds. While other books tend to be
more theoretical, Ineichen immerses readers in the history, folklore, scandals,
personalities, and performance data of this fascinating industry. The practical
information he delivers on the workings of hedge funds is outstanding.
The book opens
with an overview of hedge funds that distinguishes between absolute and relative
returns. Traditional money managers pursue returns relative to some benchmark.
Hedge fund managers ignore benchmarks and pursue absolute returns.
"There
are no rules about the game except that it will change. But, most importantly,
one should avoid becoming the game."
The next few
chapters unabashedly promote hedge funds, dispelling what the author presents as
"myths and misconceptions." Claiming advantages for absolute return strategies,
the author argues that hedge fund fees aren't excessive on a risk-adjusted
return basis. While some of these discussions have more merit than others, they
are all valuable for introducing the sorts of arguments investors can expect
from hedge fund marketing.
The next four
chapters classify hedge funds according to the strategies they employ: relative
value, event driven, macro, etc. Most books on hedge funds cover similar
territory. I think that Ineichen does it best. Not only does he explain the
trading strategies, but he delves into what can go wrong. He offers plenty of
examples drawn from actual market events. The examples are balanced—in some
examples, things pan out as hedge fund managers hoped; in others, they don't.
These chapters also provide detailed analyses of the historical performance of
the various strategies.
Contents
The Hedge Fund Industry
1. Introducing Absolute Returns
2. Myths and Misconceptions
3. Difference between Long-Only and Absolute
Return Funds
4. Advantages and Disadvantages of Investing in
Hedge Funds
Risk and Opportunities of Absolute Return
Strategies
5. Classification and Performance of Hedge Funds
6. Relative-Value and Market-Neutral Strategies
7. Event-Driven Strategies
8. Opportunistic Absolute Return Strategies
The Fund of Hedge Funds Industry
9. Industry Overview
10. Advantages and Disadvantages of Investing in
Funds of Hedge Funds
11. The Alpha in Funds of Hedge Funds
Going Forward
12. Game of Risk or Risky Game?
A recurring theme
is that the hedge funds have outperformed equity indexes and have done so with
less risk. To balance these discussions, see Lhabitant (2002), who
details unavoidable biases in historical hedge fund performance data. Ineichen
also points out the diversification benefits of hedge funds—which are more
important to many institutional investors than the purported alpha of hedge
funds
Next, the book turns to funds of hedge funds. The
obvious drawback of funds of funds is the fees they charge on top of
the substantial fees charged by the hedge funds they invest in. Never one to be
dismayed, Ineichen tells us this is like
"Paying the farmer as well
as the milk man."
A closing chapter
places hedge funds in an historical context. It talks about bubbles and paradigm
shifts. It challenges the notion that long-term investors should invest in stock
markets. It points out that our perception of stock markets has been shaped by
the recent experience of US stock markets, but that the experience of all world
stock markets during the 20th century was not so rosy. This is a good chapter.
While you may not accept all that it says, it will certainly get you thinking.
A nice feature of
this book is that it goes beyond citing relevant literature. At various points,
the author lists articles and briefly describes each. This is handy for
researchers or anyone who wants to get oriented to the literature on hedge
funds.
Overall, I don't
care for the tone of the book, but I give it grudging respect. No other book
affords the practical familiarity with the hedge fund industry that this one
does. Don't make it the only book you read on hedge funds, but do read it.
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