Funds of Hedge Funds: Performance, Assessment, Diversification, and Statistical Properties (Quantitative Finance)

Funds of Hedge Funds......Page 4
Copyright Page......Page 5
Contents......Page 6
Preface and Acknowledgments......Page 14
About the editor......Page 16
List of contributors......Page 18
Part One: Performance......Page 32
1.1 Introduction......Page 34
1.2 Hedge fund data and biases......Page 36
1.3 Factor models for hedge funds......Page 37
1.4 Model estimation......Page 40
1.6 Optimizing funds of hedge funds......Page 48
1.7 Cleaning the covariance matrix......Page 49
1.8 Performance analysis of rank alpha portfolios......Page 51
1.9 Conclusion......Page 53
References......Page 54
2.1 Introduction......Page 58
2.2 Database......Page 59
2.3 Methodology......Page 60
2.5 Bias analysis......Page 62
2.6 Persistence in performance......Page 66
2.7 Conclusion......Page 72
References......Page 73
3.1 Introduction......Page 76
3.2 The KP efficiency measure......Page 78
3.3 Evaluation results......Page 82
3.4 Distributional analysis......Page 84
3.5 Conclusion......Page 86
References......Page 87
4.1 Introduction......Page 88
4.2 Experimental framework......Page 89
4.3 Factor model for fund of funds......Page 91
4.4 Sample formation......Page 93
4.5 Performance decomposition of FOF portfolios......Page 95
4.6 Principal components of FOF returns......Page 101
4.7 Conclusion......Page 108
References......Page 109
5.1 Introduction......Page 110
5.2 Data......Page 112
5.3 Methodology......Page 115
5.4 Results......Page 119
5.5 Conclusion......Page 126
References......Page 127
6.1 Characteristics of funds of funds......Page 130
6.2 Comparing returns: funds of funds vs. hedge funds......Page 131
6.3 Ancient history vs. modern history: LTCM as the defining moment......Page 133
6.4 Factor analysis of returns......Page 134
6.5 The future of funds of funds......Page 136
References......Page 137
7.1 Introduction......Page 138
7.3 Investable hedge fund indices......Page 139
7.4 Distribution of returns and potential biases......Page 141
7.5 Asset-based style factors......Page 142
7.7 Fung and Hsieh model alphas and information ratio comparisons......Page 144
7.8 Correlation with traditional asset returns and lagged equity return comparisons......Page 147
7.9 Conclusion......Page 148
References......Page 149
8.1 Introduction......Page 150
8.2 Data......Page 152
8.3 Methodology......Page 154
8.4 Empirical results......Page 156
References......Page 162
Part Two: Diversification, Selection, Allocation, and Hedge Fund Indices......Page 164
9.1 Introduction......Page 166
9.2 The art and science of diversification......Page 167
9.3 Analysis......Page 168
9.4 Diversification results......Page 169
9.5 How about the fees?......Page 173
References......Page 174
10.1 Introduction......Page 176
10.2 Sharpe's model for style analysis......Page 177
10.3 Data set......Page 179
10.4 Hedge fund classification......Page 180
10.5 Accuracy of Sharpe's model......Page 189
10.6 Measuring the style drift......Page 194
References......Page 197
Appendix......Page 200
11.1 Introduction......Page 202
11.2 Data......Page 204
11.3 Method......Page 206
11.4 Results......Page 209
11.5 Conclusion......Page 215
References......Page 217
12.1 Introduction......Page 220
12.2 The model......Page 225
12.3 The results......Page 228
References......Page 232
13.1 Introduction......Page 234
13.2 Decomposition......Page 235
References......Page 241
Part Three: Construction and Statistical Properties of Funds of Hedge Funds......Page 242
14.1 Introduction......Page 244
14.2 Hedge funds: background......Page 246
14.3 Testing for normality......Page 249
14.4 Data and summary performance information......Page 254
14.5 Results......Page 261
References......Page 267
15.1 Introduction......Page 270
15.2 Mean-variance spanning tests......Page 271
15.4 Empirical results......Page 275
15.5 Conclusion......Page 279
References......Page 280
Appendix......Page 281
16.1 Introduction......Page 282
16.2 Performance assessment basics......Page 283
16.3 Data and methodology......Page 285
16.4 Performance characteristics of funds of funds......Page 286
16.6 Results......Page 289
16.7 Conclusion......Page 291
References......Page 292
17.1 Introduction......Page 294
17.2 Estimation of the regimes for the core assets......Page 297
17.3 Implications for hedge funds returns modeling......Page 298
17.4 An application to stress testing......Page 313
References......Page 315
18.1 Introduction......Page 318
18.2 Methodology......Page 319
18.4 Results......Page 320
References......Page 337
19.1 Introduction......Page 340
19.2 Data set: defining market patterns......Page 342
19.3 Methodology: investor-driven objectives and the optimization algorithm......Page 346
19.4 Empirical analysis: exhibiting the new degrees of freedom......Page 349
19.5 Conclusion......Page 354
References......Page 355
Part Four: Monitoring Risk, Overview of Funds of Funds, Due Diligence, and Special Classes of Funds of Funds......Page 356
20.1 Introduction......Page 358
20.2 Funds of hedge funds......Page 359
20.3 Investing in funds of hedge funds: a practical approach......Page 360
20.4 Data description, empirical analysis, and results......Page 363
20.5 Analysis of trade-off......Page 372
20.6 Conclusion......Page 378
References......Page 379
21.1 Introduction......Page 380
21.3 Ongoing portfolio management......Page 381
21.4 Returning to the problem of the individual investor......Page 384
21.5 Tracking funds of funds......Page 385
21.6 Conclusion......Page 390
References......Page 392
22.1 Introduction......Page 394
22.2 The gap: fiduciary responsible investing vs. private client products......Page 395
22.3 Exploring institutional fiduciary responsibility......Page 396
22.4 Exploring fiduciary responsibility: what IBM has that the average hedge fund of funds needs to incorporate......Page 397
22.5 Conclusion......Page 404
References......Page 405
23.1 Introduction......Page 406
23.2 Development of synthetic CDO squares......Page 407
23.3 Structure of synthetic CDO squares......Page 408
23.4 Recharacterization risk......Page 410
References......Page 412
24.2 Emerging demand for natural resources investments......Page 414
24.3 Diversified, active-management opportunities in natural resources investing......Page 415
24.4 Risk management in natural resources futures trading......Page 419
24.5 Due diligence in natural resources fund of funds investing......Page 423
24.6 Conclusion......Page 429
References......Page 430
25.1 Introduction......Page 432
25.2 Diversification and overdiversification......Page 434
25.3 Liquidity......Page 439
25.4 Transparency......Page 440
25.5 Factor and impact analysis......Page 443
References......Page 447
26.1 Introduction: If only I had good risk analytics......Page 448
26.2 You're not in Kansas anymore......Page 449
26.3 Click your heels and say "There's nothing like diversification"......Page 451
26.4 We're off to see the wizard......Page 453
26.5 The man behind the curtain......Page 454
26.6 Follow the yellow brick road......Page 460
References......Page 462
27.1 Introduction......Page 464
27.2 Indicators for hedge fund selection......Page 465
27.3 Data......Page 469
27.4 Empirical results......Page 470
27.5 Conclusion......Page 483
References......Page 484
B......Page 486
C......Page 487
E......Page 488
F......Page 489
H......Page 491
M......Page 492
P......Page 494
S......Page 495
Z......Page 497