Hedge Fund Analysis An In-Depth Guide to Evaluating Return Potential and Assessing Risks

by Travers, Frank J.

• ISBN13: 9781118175460
• ISBN10: 1118175468
• Edition: 1st
• Format: Hardcover
• Copyright: 2012-10-02
• Publisher: Wiley

Summary

Hedge Fund Analysis will provide a broad framework covering the hedge fund due diligence process from initial screening to analytical techniques, interviewing skills, and legal and contract negotiations. Having guided the reader through the selection process, it will demonstrate a variety of mechanisms for monitoring and tracking hedge funds and the underlying hedge fund portfolios. This comprehensive guide will explain each stage of the process in minute detail, providing specific examples which fully explain the benefits and pitfalls that can occur on each step of the way. Every analytic tool and technique available will be explored, and arguments will be supported with examples of real situations. This book has five sections. Section 1 will provide a detailed background and illustration on how to source hedge funds and how to screen through them (there are 7,000+ of them out there, so screening is critical). Section 2 will lay out a thorough process for evaluating the funds, from initial interviewing to performance analysis to a primer of interviewing techniques, including both verbal and non verbal communication (body language). Section 3 will break out what questions to ask by strategy. It is important to know what key risk factors are by strategy and to ask the "right" questions. Each major strategy will have its own chapter that will discuss the strategy, associated risks and a detailed list of questions (along with right and wrong responses). Section 4 incorporates non-investment analysis such as operational due diligence and risk management. Section 5 shows how to evaluate all the components of the due diligence process to rank a hedge fund's strengths and weaknesses. This section will also cover how to put together a portfolio of hedge funds and how to monitor investments once they are made.

Author Biography

FRANK J. TRAVERS, CFA, is a portfolio manager at Larch Lane Advisors. He has over two decades of experience analyzing traditional long-only, private equity, and hedge fund strategies. Previously, he was the director of research at First Peninsula Capital and a portfolio manager at Pine Street Advisors and CIC Group. Additionally, he held positions as the director of due diligence at CIBC World Markets, associate director of international equity research at Evaluation Associates, and senior analyst positions at Morgan Stanley Asset Management and RCB Trust. Travers is the author of Investment Manager Analysis: A Comprehensive Guide to Portfolio Selection, Monitoring, and Optimization, also published by Wiley. He received his BS in finance from St. John's University and his MBA from Fordham University.

Table of Contents

Introduction xi

PART ONE Background

CHAPTER 1 Hedge Fund History 3

So Who Invented the Hedge Fund? 4

The Samurai 4

The Academic 5

The Legend 14

The Innovator 17

CHAPTER 2 Hedge Fund Asset Class 29

Definition 29

Hedge Fund Structure 31

Hedge Fund Strategies 32

Advantages of Allocating to Hedge Funds 43

Hedge Fund Size and Age Impacts Performance 52

PART TWO Hedge Fund Due Diligence

CHAPTER 3 Due Diligence Process 57

Key Areas of Focus within Each Component of Due Diligence 57

The Due Diligence Process Highlighted in This Book 60

Putting It All Together 67

Some Initial Thoughts 70

CHAPTER 4 Initial Data Collection 77

Data Collection 78

Due Diligence Questionnaire (DDQ) 80

Fictional Capital Management 80

Other Materials 106

Further Analysis 108

13F Analysis 116

Hedge Fund Journal 119

CHAPTER 5 Initial Interview 121

Initial Call or Meeting 121

Phone Interviews 122

Meeting Notes 139

CHAPTER 6 Quantitative Analysis 145

Performance Measures 146

Absolute Return Measures 146

Absolute Risk Measures 154

Regression-Based Statistics 164

Peer Group Analysis 168

CHAPTER 7 Portfolio Analysis 173

Attribution Analysis 174

Fundamental Analysis 189

Evaluating Portfolio Data 193

CHAPTER 8 Onsite Interviews 217

Onsite Meeting Strategies 219

One-on-One Meetings 219

Meeting with More Than One Person 222

Different Perspectives 223

Meeting Notes 224

Onsite Interviews at Fictional Capital Management (FCM) 228

CHAPTER 9 Operational Due Diligence 259

Case Study: Bayou Fund 259

Definition 261

Importance of Operational Due Diligence 263

Categorization of Operational Due Diligence 267

Interview with FCM Operational Staff 301

CHAPTER 10 Risk Due Diligence 309

Graphical Depiction of Hedge Fund Risks 312

Risk Due Diligence 314

Factor Decomposition Analysis 330

Interview with FCM Risk Manager 333

CHAPTER 11 Reference and Background Checks 339

Onlist and Offlist References 340

Internet and Social Media 341

Contacting References 343

Problematic References 346

Whose References Should You Check? 349

How Many Reference Calls Are Enough? 350

Background Checks 352

Summary of Reference Calls for FCM 353

CHAPTER 12 Hedge Fund Scoring Model and Decision Making 357

Hedge Fund Scoring Model 358

Putting It All Together 374

About the Author 379

Index 381