Hedge Fund Investing

Transcription

1 Hedge Fund Investing Kevin R. Mirabile

2 Part One Overview... 1 Chapter 1 The Basics of Hedge Fund Investing... 1 Learning Objectives... 1 Introduction... 1 What Are Alternative Investments?... 1 Hedge Fund Characteristics and Structures... 3 Structures and Domiciles... 3 Management Company Responsibility and Organizational Design... 4 Hedge Funds versus Mutual Funds... 7 Size and Scope of the Mutual Fund Industry... 9 Size and Scope of the Hedge Fund Industry... 9 Summary Review Questions Review Answers Chapter 2 Hedge Fund Strategies, Performance Measurement, and Risk Learning Objectives Introduction Types of Hedge Fund Strategies Hedge Fund Returns Impact of Leverage, Short Selling, and Derivatives An Example of a Leveraged Long Position in a Margin Account or via a Repo Transaction An Example of a Leveraged Short-Sale Position in a Margin Account or via a Repo Transaction Introduction to Performance and Risk Measurement Arithmetic and Geometric Mean Returns Value at Risk as a Measure or Fund Constraint Summary Review Questions Review Answers Chapter 3 Who Invests in Hedge Funds and Why? Learning Objectives Introduction Academic Research In Support Of Hedge Fund Investing Hedge Funds and Asset Allocation Individual versus Institutional Investors Asset Allocation and Portfolio Effects High-Net-Worth Individuals Family Offices Endowments Public Pension Plans Sovereign Wealth Funds Funds of Hedge Funds (FoFs) Seed Investors Why Don t Investors Allocate More To Hedge Funds? The Industry Is Still Young Investments in Hedge Funds Negatively Impact Portfolio Liquidity Lack of Transparency Reputational Concerns Concentration Risk Business Risk or Closure Risk Summary Review Questions Review Answers... 49

3 Chapter 4 Industry Trends, Flows, and Characteristics Learning Objectives Introduction Pre-1998 When No One Really Cared to 2002 When Everyone Took Notice to 2007 The Golden Age and 2009 The Root of All Evil? to Present Savior or Fraud? Industry Characteristics Current State of the Industry State of U.S. Hedge Fund Regulations Investment Advisers Act of Securities Act of Securities Exchange Act of Investment Company Act of How Are Funds Bought and Sold? Summary Review Questions Review Answers Part Two Understanding the Strategies Chapter 5 Global Macro Investing Learning Objectives Introduction The Global Macro Strategy Organizational Structure Portfolio Characteristics Top-Down Discretionary or Directional Trading Systematic Trading and Trend Following Fund Terms and Conditions Flows and Performance What Is the Profile of a Global Macro Manager? Bridgewater Associates Moore Capital Management Tudor Investment Corporation Measuring Returns and Evaluating Risk Summary Review Questions Review Answers Chapter 6 Equity-Oriented Styles Learning Objectives Introduction Long and Short Equity Strategy Organizational Structure Investment Process and Portfolio Characteristics Strategy Profit or Loss and Exposure Reporting Portfolio Examples Fund Terms and Conditions Flows and Performance What Is the Profile of a Long and Short Equity Manager? Edenbrook Capital Management Renaissance Technologies Measuring Returns and Evaluating Risk Summary Review Questions Review Answers ii

4 Chapter 7 Fixed-Income-Oriented Strategies Learning Objectives Introduction Relative Value Trading Organizational Structure Investment Process and Portfolio Characteristics Strategy Profit or Loss and Exposure Reporting Fixed-Income Relative Value Trade Example Credit Trade Example Convertible Arbitrage Trade Example Fund Terms and Conditions Flows and Performance What Is the Profile of a Fixed-Income-Oriented Manager? Pine River BlueCrest Capital Tenor Capital Management Measuring Returns and Evaluating Risk Summary Review Questions Review Answers Chapter 8 Multistrategy Funds, Funds of Hedge Funds, and Replication Products Learning Objectives Introduction Multistrategy Funds Organizational Structure Unique Opportunities and Risks Associated With Multistrategy Funds Flows and Performance What Is the Profile of a Multistrategy Manager? Citadel Investment Balyasny Asset Management Strategy Performance and Risk Metrics Multistrategy Funds Funds of Funds Organizational Structure of Fund of Funds Unique Opportunities and Risk Associated With Funds of Funds Flows and Performance What Is the Profile of a Fund of Funds Manager? Permal Grosvenor Hedge Fund Replication Strategies and Alternative Beta Products Summary Review Questions Review Answers Chapter 9 Portfolio Financing and Secondary Market Trading Learning Objectives Introduction Basic Financing Tools Impact of Netting Cash Flows on Interest Costs Impact of Margin on Counterparty Risk Impact of Portfolio Risk Measurement on Margin Levels The Importance of Asset and Liability Management How Do Dealers Fund and Profit from Hedge Fund Positions? Hedge Funds Exposure to Banks, Brokers, and Dealers in the Event of Dealer Bankruptcy or Insolvency (as in the Cases of Refco or Lehman Bros.) How Do the Equity and Fixed-Income Financing Markets Operate? Secondary Trading In Hedge Fund Shares Summary iii

5 Review Questions Review Answers Part Three Evaluating Individual Fund Risk and Reward Chapter 10 Measuring Performance and Performance Persistence Learning Objectives Introduction Understanding Historical Returns, Normality, Portfolio Sensitivity, and Data Bias Historical Returns Measuring Normality of Fund Performance Data Exposure to Specific Adverse Price Movements or Historical Scenarios Data Reliability Academic Findings on Performance Persistence Summary Review Questions Review Answers Chapter 11 Impact of Fund Characteristics and Terms on Performance Learning Objectives Introduction Incentives Agency Theory Manager Discretion Discretion and Performance Location, Domicile, and Partners Economies of Agglomeration Summary Review Questions Review Answers Chapter 12 Performing Due Diligence on Specific Managers and Funds Learning Objectives Introduction Be Prepared Learn From the Past From both Successes and Failures If It Looks Too Good To Be True, It Probably Is Remember, It s Still about Returns! Common Elements of the Due Diligence Process Investment Management Risk Management Process Fund Operating Environment, Documentation, Financials, and Service Providers Internal Control Assessment Documents and Disclosures Service Provider Evaluation Business Model Risk Fraud Risk Summary Review Questions Review Answers Chapter 13 Evaluating the Roles of Service Providers Learning Objectives Introduction Who Are a Fund s Critical Service Providers? Fund Administrator Scope of Services Why Should Investors Care about Fund Administration? iv

6 Firm Profiles Prime Brokers Scope of Services Why Should Investors Care about a Fund s Prime Broker? Questions to Ask about Prime Brokers Firm Profiles Auditors Scope of Services Firm Profiles Legal Counsel Scope of Services Firm Profiles Technology Environment and Service Providers Scope of Services Why Should Investors Care about a Fund s Technology Environment? Firm Profiles Additional Considerations Summary Review Questions Review Answers Chapter 14 Observations and Outlook Learning Objectives Introduction Hedge Fund Industry Challenges Industry Surveys and Outlook What Is the Theoretical Valuation of the Hedge Fund Industry Today? Summary Review Questions Review Answers Glossary Index v