Hedge Fund Modelling and Analysis Using Excel and VBA

by Darbyshire, Paul; Hampton, David

• ISBN13: 9780470747193
• ISBN10: 0470747196
• Edition: 1st
• Format: Hardcover
• Copyright: 2012-03-05
• Publisher: Wiley

Summary

Hedge Fund Analysis and Modeling Using Excel and VBA is a practical and implementation driven text that will guide readers through real modeling and analysis exercises for hedge funds, enabling them to identify risk and return factors across their investments. Starting with an overview of Hedge Funds and covering the key styles and strategies adopted by hedge fund managers, the book then moves on to look at Hedge Fund data sources - a key area in understanding the strengths and weaknesses of a hedge funds style and strategy. The book then discusses Hedge Fund performance measures, both basic and risk-adjusted, and how to model hedge fund returns. Finally, the book covers more sophisticated Hedge Fund analysis, and risk management techniques.The book features a DVD, which includes Excel and VBA spreadsheets with step by step audio and visual tutorials, and classroom style video tutorials on key modeling aspects. This book will serve as a complete course in Hedge Fund Modeling and Analysis and will arm Hedge Funds with the full range of tools they need to manage their risks and capitalize on the return profiles of their investment styles.

Author Biography

PAUL DARBYSHIRE gained his PhD in Theoretical Physics from King’s College London and then began his career working has a Quantitative Analyst and Trader at HSBC on the Exotic Derivatives and Structured Products desk. He has subsequently been involved in the development and implementation of a variety of trading and risk management platforms for a number of major investment banks around the globe. Over the past several years Paul has been responsible for the analysis and design of cutting edge algorithms in the development of behavioural finance models at Oxford University. Paul has also provided many private equity firms, hedge funds and asset management companies with consultancy in areas such as dynamic portfolio optimisation, trading platform design, software engineering and risk management.

DAVID HAMPTON gained his PhD in Electrical Engineering from the Queen’s University of Belfast and an international MBA from Institut Superieur de Gestion in Paris, New York and Tokyo before joining Bank of America Capital Markets in London. David was previously an Adjunct Finance Professor at Skema Business School in Sophia Antipolis where he taught Financial Engineering and Excel/VBA Programming at the MSc level. At EDHEC Business School in Nice, he was responsible for managing their range of five MSc courses as Assistant Dean of the Financial Economics Track. An NFA registered CTA since 1997, David has been active as a consultant to the hedge fund community and as a Hedge Fund Manager with particular expertise in Global Macro Managed Futures and Long Short Equity investment styles.

Both David and Paul are Directors of darbyshirehampton; an innovative quantitative research, advisory, and consultancy firm specialising in hedge funds and the alternative investment industry. Website: www.darbyshirehampton.com.

Table of Contents

Preface	p. xi
The Hedge Fund Industry	p. 1
What Are Hedge Funds?	p. 1
The Structure of a Hedge Fund	p. 4
Fund Administrators	p. 5
Prime Brokers	p. 5
Custodian, Auditors and Legal	p. 6
The Global Hedge Fund Industry	p. 7
North America	p. 8
Europe	p. 10
Asia	p. 11
Specialist Investment Techniques	p. 12
Short Selling	p. 12
Leverage	p. 14
Liquidity	p. 15
New Developments for Hedge Funds	p. 16
UCITS III Hedge Funds	p. 16
The European Passport	p. 19
Restrictions on Short Selling	p. 20
Major Hedge Fund Strategies	p. 23
Single and Multi Strategy Hedge Funds	p. 23
Fund of Hedge Funds	p. 25
Hedge Fund Strategies	p. 27
Tactical Strategies	p. 28
Global Macro	p. 28
Managed Futures	p. 31
Long/Short Equity	p. 36
Pairs Trading	p. 38
Event-Driven	p. 42
Distressed Securities	p. 42
Merger Arbitrage	p. 46
Relative Value	p. 49
Equity Market Neutral	p. 49
Convertible Arbitrage	p. 50
Fixed Income Arbitrage	p. 54
Capital Structure Arbitrage	p. 56
Swap-Spread Arbitrage	p. 57
Yield CurveArbitrage	p. 58
Hedge Fund Data Sources	p. 61
Hedge Fund Databases	p. 61
Major Hedge Fund Indices	p. 65
Non investable and Investable Indices	p. 66
Dow Jones Credit Suisse Hedge Fund Indexes	p. 68
Liquid Alternative Betas	p. 70
Hedge Fund Research	p. 73
Hedge Fund net	p. 77
FTSE Hedge	p. 77
FTSE Hedge Momentum Index	p. 78
Greenwich Alternative Investments	p. 79
GAI Investable Indices	p. 80
Morningstar Alternative Investment Center	p. 83
MSCI Hedge Fund Classification Standard	p. 83
MSCI Investable Indices	p. 85
EDHEC Risk and Asset Management Research Centre (www.edhec-risk.com)	p. 86
Database and Index Biases	p. 88
Survivorship Bias	p. 89
Instant History Bias	p. 90
Benchmarking	p. 91
Tracking Error	p. 92
Weighting Schemes	p. 95
Statistical Analysis	p. 99
Basic Performance Plots	p. 99
Value Added Monthly Index	p. 99
Histograms	p. 102
Probability Distributions	p. 105
Populations and Samples	p. 106
Probability Density Function	p. 107
Cumulative Distribution Function	p. 108
The Normal Distribution	p. 109
Standard Normal Distribution	p. 110
Visual Tests for Normality	p. 111
Inspection	p. 111
Normal Q-Q Plot	p. 112
Moments of a Distribution	p. 114
Mean and Standard Deviation	p. 114
Skewness	p. 117
Excess Kurtosis	p. 119
Data Analysis Tool: Descriptive Statistics	p. 120
Geometric Brownian Motion	p. 122
Uniform Random Numbers	p. 125
Covariance and Correlation	p. 126
Regression Analysis	p. 131
Ordinary Least Squares	p. 131
Coefficient of Determination	p. 133
Residual Plots	p. 134
Jarque-Bera Normality Test	p. 135
Data Analysis Tool: Regression	p. 138
Portfolio Theory	p. 142
Mean Variance Analysis	p. 142
Solver: Portfolio Optimisation	p. 145
Efficient Portfolios	p. 148
Risk-Adjusted Return Metrics	p. 151
The Intuition behind Risk Adjusted Returns	p. 152
Risk Adjusted Returns	p. 154
Common Risk Adjusted Performance Ratios	p. 157
The Sharpe Ratio	p. 160
The Modified Sharpe Ratio	p. 162
The Sortino Ratio	p. 163
The Drawdown Ratio	p. 167
Common Performance Measures in the Presence of a Market Benchmark	p. 170
The Information Ratio	p. 172
The M Squared Metric	p. 173
The Treynor Ratio	p. 174
Jensen's Alpha	p. 178
The Omega Ratio	p. 181
Asset Pricing Models	p. 185
The Risk Adjusted Two Moment Capital Asset Pricing Model	p. 185
Interpreting H	p. 189
Static Alpha Analysis	p. 191
Dynamic Rolling Alpha Analysis	p. 193
Multi factor Models	p. 195
The Choice of Factors	p. 196
A Multi Factor Framework for a Risk Adjusted Hedge Fund Alpha League Table	p. 202
Alpha and Beta Separation	p. 208
Dynamic Style Based Return Analysis	p. 210
The Markowitz Risk Adjusted Evaluation Method	p. 214
Hedge Fund Market Risk Management	p. 223
Value at Risk	p. 223
Traditional Measures	p. 226
Historical Simulation	p. 226
Parametric Method	p. 229
Monte Carlo Simulation	p. 230
Modified Var	p. 233
Expected Shortfall	p. 236
Extreme Value Theory	p. 239
Block Maxima	p. 240
Peaks over Threshold	p. 241
References	p. 245
Important Legal Information	p. 249
Index	p. 251
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