Lhabitant offers a solid introductory treatment of
hedge funds that primarily targets buy-side professionals. Its appeal is the
fact that it delves into aspects of hedge funds that other books don't address.
In particular, it raises a number of concerns—biases in hedge fund indexes,
skewed return distributions, etc.—that go beyond the usual warnings about
transparency and liquidity. For this reason, I recommend it as a valuable
supplement for McCrary (2002).
Opening chapters describe the history of hedge
funds; regulatory frameworks for hedge funds in jurisdictions around the world;
and business structures for hedge funds. The material is informative and
includes plenty of anecdotes and industry folklore. We get to know stories
behind famous or infamous managers: Jeff Vinick, Julian Robertson, Michael
Berger and David Mobley.
Next, Lhabitant turns to the trading strategies of
hedge funds. He starts off by describing basic concepts such as short-selling,
margin, derivatives, and leverage. Many readers will find this too basic and
skip forward. Subsequent discussions of various "arbitrage" strategies,
event-driven strategies, and directional strategies are solid but cover ground
that is also covered by numerous other authors.
An excellent chapter on hedge fund indices
describes the many indices that are available to investors. It also identifies
the biases that creep into these benchmarks:
survivorship
bias,
selection
bias,
backfill bias,
double-counting
bias, and
reporting
bias.
Several chapters describe the process of investing
in hedge funds. These discussions are the least satisfying of the book. The
author starts with the basics, developing such notions as diversification,
efficient frontiers, the Sharpe ratio, etc. While these discussions offer one of
the best non-technical introductions to this material that I am aware of, it
seems out of place. Any reader who is in a position to invest millions of
dollars in a limited partnership should already be thoroughly familiar with this
material.
Contents
1. Introduction
Hedge Fund Overview
2. The basics revisited
3. Legal environment and structures
4. Operational and organizational structures
Hedge Fund Strategies
5. Introduction
6. The tools used by hedge funds
7. Long/short strategies
8. Arbitrage and relative value strategies
9. Event-driven strategies
10. Directional strategies
11. Hedge fund indices
12. Hedge fund performance: beyond NAVs
Hedge Fund Investing
13. Introduction
14. Asset allocation
15. Hedge fund selection
16. Funds of funds and metadiversification
17. Capital-guaranteed products
18. Advanced topics: inside the black box
19. Conclusion
Appendix: The statistics of hedge funds
The author makes important points about the
skewness of hedge fund returns and why this can undermine traditional
mean-variance analysis.
A chapter on selecting funds touches "all the
bases" but could offer more depth. For example, there is a list of questions to
ask hedge fund management, but no indication of what answers to expect. What
should an investor look for in a fund's custody arrangement? How about their fee
schedule? Lhabitant doesn't say.
A chapter on funds of funds describes these
constructs, points out their pitfalls, and recommends hedge fund consultants as
a viable alternative. Another chapter describes capital guarantee products,
which are essentially OTC put options on a hedge fund. A closing chapter is a
non-technical introduction to the many sorts of quantitative tools used in
analyzing performance and marketing hedge funds: factor models, principal
component analysis, style analysis, style "radars," etc.
There are plenty of books available on hedge
funds—several better than this. What makes Lhabitant appealing is the fact that
it is different from other books. It fills in details and offers warnings that
other books don't. If you read two books on hedge funds, make Lhabitant the
second.
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survivorship
bias,