Funds of Hedge Funds, 1st Edition
Preface and Acknowledgments
About the editor
List of contributors
Part One Performance
1 Rank alpha funds of hedge funds
Carol Alexander and Anca Dimitriu
1.1 Introduction
1.2 Hedge fund data and biases
1.3 Factor models for hedge funds
1.4 Model estimation
1.5 Rank alpha
1.6 Optimising funds of hedge funds
1.7 Cleaning the covariance matrix
1.8 Performance analysis of rank alpha portfolios
1.9 Conclusion
References
2 Funds of hedge funds: bias and persistence in returns
Daniel Capocci and Georgers Hübner
2.1 Introduction
2.2 Database
2.3 Methodology
2.4 Descriptive statistics
2.5.1 Bias analysis
2.5.2 Survivorship bias
2.5.3 Instant return history bias
2.6 Persistence in performance
2.6.1 Persistence in performance based on past performance
2.6.2 Persistence in performance based on past risk measures
2.7 Conclusion
References
3 Replication and evaluation of fund of funds returns 1994-2005
Harry M. Kat and Helder P. Palaro
3.1 Introduction
3.2 The KP efficiency measure
3.3 Evaluation results
3.4 Distributional analysis
3.5 Conclusion
References
4 Factor decomposition of fund of funds returns
Jean-François Bacmann, Pierre Jeanneret, and Stefan Scholz
4.1 Introduction
4.2 Experimental framework
4.3 Factor model for fund of funds
4.4 Sample formation
4.5 Performance decomposition of FOF portfolios
4.6 Principal components of FOF returns
4.7 Conclusion
References
5 Optimal fund of fund asset allocation: hedge funds, CTAs and REITs
Nicolas Papageorgiou and Alain Elkaim
5.1 Introduction
5.2 Data
5.3 The methodology
5.4 Results
5.5 Conclusion
References
6 The changing performance and factor risks of fund of funds in the modern
period
Keith H. Black
6.1 Characteristics of funds of funds
6.2 Comparing returns: funds of funds vs. hedge funds
6.3 Ancient history vs. modern history: LTCM as the defining moment
6.4 Factor analysis of returns
6.5 The future of funds of funds
References
7 Hedge fund indices: are they cost-effective alternatives to fund of funds?
Kathryn Wilkens
7.1 Introduction
7.2 Fund of funds
7.3 Investable hedge fund indices
7.4 Distribution of returns and potential biases
7.5 Asset based style factors
7.6 Mean excess return and Sharpe ratio comparisons
7.7 Fung and Hsieh model alphas and information ratio comparisons
7.8 Correlation with traditional asset returns and lagged equity return comparisons
7.9 Conclusion
References
8 Simple hedge fund strategies as an alternative to funds of funds: evidence from
large cap funds
Greg N. Gregoriou, Georges Hübner, Nicolas Papageorgiou, and Fabrice Rouah
8.1 Introduction
8.2 Data
8.3 Methodology
8.4 Empirical results
8.5 Conclusion
References
Part Two Diversification, Selection, Allocation and Hedge Fund Indices
9 Funds of funds of hedge funds: welcome to diworsification
François-Serge Lhabitant and Nicolas Laporte
9.1 Introduction
9.2 The art and science of diversification
9.3 Analysis
9.4 Diversification results
9.5 How about the fees?
9.6 Conclusion
References
10 Style analysis of funds of hedge funds: measurement of asset allocation and style drift
Andreas Oehler and Oliver A. Schwindler
10.1 Introduction
10.2 Sharpe’s model for style analysis
10.3 Data set
10.4 Hedge fund classification
10.5 Accuracy of Sharpe’s model
10.6 Measuring the style drift
10.7 Conclusion
References
11 Gains from adding funds of hedge funds to portfolios of traditional assets: An international perspective
Niclas Hagelin, Bengt Pramborg, and Fredrik Stenberg
11.1 Introduction
11.2 Data
11.3 Method
11.4 Results
11.5 Conclusion
References
12 Tactical asset allocation for hedge fund indices at one- to six-month horizons
Laurent Favre
12.1 Introduction
12.2 The Model
12.3 The results
12.4 Conclusion
References
13 Single strategy funds of hedge funds: how many funds?
Ryan J. Davies, Harry M. Kat, and Sa Lu
13.1 Introduction
13.2 Decomposition
13.3 Conclusion
References
Part Three Construction, and Statistical Properties of Funds of Hedge
Funds
14 The distributional characteristics of fund of hedge fund returns
Elaine Hutson, Margaret Lynch and Max Stevenson
14.1 Introduction
14.2 Hedge funds: background
14.3 Testing for normality
14.4 Data and summary performance information
14.5 Results
14.6 Conclusion
References
15 Funds of funds and diversification effect
Maher Kooli
15.1 Introduction
15.2 Mean-variance spanning tests
15.3 Data description
15.4 Empirical results
15.5 Conclusion
References
16 Higher-moment performance characteristics of funds of funds
Zsolt Berenyi
16.1 Introduction
16.2 Performance assessment basics
16.3 Data and methodology
16.4 Performance characteristics of funds of funds
16.5 Enhancing FOF performance
16.6 Results
16.7 Conclusion
References
17 The market risk of funds of hedge funds: a conditional approach
Florent Pochon and Jérôme Teïletche
17.1 Introduction
17.2 Implications for hedge funds returns modelling
17.3 An application to stress testing
17.4 Conclusion
References
18 Revisiting the Fama and French model: An application to funds of funds using
nonlinear methods
Eric Dubé, Clément Gignac and François Eric Racicot
18.1 Introduction
18.2 Methodology
18.3 Data
18.4 Results
18.5 Conclusion
References
19 Investor’s choice: an investor-driven, forward-looking optimization approach to fund of hedge fund construction
Clemens H. Glaffig
19.1 Introduction
19.2 The data set: defining market patterns
19.3 The methodology: investor-driven objectives and the optimization algorithm
19.4 Empirical analysis: exhibiting the new degrees of freedom
19.5 Conclusion
Reference
Part Four Monitoring Risk, Overview of FOFs, Due Diligence, and
Special Classes of Funds of Funds
20 Moments analysis in risk and performance monitoring of funds of hedge funds
David K.C. Lee, Kok Fai Phoon, and Choon Yuan Wong
20.1 Introduction
20.2 Funds of hedge funds
20.3 Investing in funds of hedge funds – a practical approach
20.4 Data description, empirical analysis and results
20.5 Analysis of trade-off
20.6 Conclusion
References
21 An overview of funds of hedge funds
Jean Brunel
21.1 Introduction
21.2 Creating a portfolio of hedge funds
21.3 Ongoing portfolio management
21.4 Returning to the problem of the individual investor
21.5 Tracking funds of funds
21.6 Conclusion
References
22 Institutional investment due diligence on funds of hedge funds
John E. Dunn, III
22.1 Introduction
22.2 The gap: fiduciary responsible investing vs. private client products
22.3 Exploring institutional fiduciary responsibility
22.4 Exploring fiduciary responsibility: what IBM has that the average hedge fund of fund needs to incorporate
22.5 Conclusion
References
23 Synthetic CDO squares and the continuing evolution of funds of funds
Paul Ali
23.1 Introduction
23.2 Development of synthetic CDO squares
23.3 Structure of synthetic CDO squares
23.4 Recharacterisation risk
23.5 Conclusion
References
24 Natural resources fund of funds: essays on active management, risk management, and due diligence
Rian Akey, Hilary Till, and Aleks Kins
24.1 Introduction
24.2 Emerging demand for natural-resources investments
24.3 Diversified, active-management opportunities in natural-resources investing
24.4 Risk management in natural-resources futures trading
24.5 Due diligence in natural-resources fund of fund investing
24.6 Conclusion
References
25 Identifying and monitoring risk in a fund of hedge funds portfolio
Meredith A. Jones
25.1 Introduction
25.2 Diversification and over-diversification
25.3 Liquidity
25.4 Transparency
25.5 Factor and impact analysis
25.6 Conclusion
References
26 The wizardry of analytics for funds of funds
Mary Fjelstad and Leola Ross
26.1 If I only had good risk analytics...
26.2 You’re not in Kansas anymore
26.3 Click your heels and say “There’s nothing like diversification…”
26.4 We’re off to see the wizard…
26.5 The man behind the curtain
26.6 Follow the yellow brick road…
26.7 You’re never going back to Kansas
27 Quantitative hedge fund selection for fund of funds
Stephan Joehri and Markus Leippold
27.1 Introduction
27.2 Indicators for hedge fund selection
27.3 Data
27.4 Empirical results
27.5 Conclusion
References
