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9781576601242

Hedge Fund of Funds Investing An Investor's Guide

by
  • ISBN13:

    9781576601242

  • ISBN10:

    1576601242

  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2004-01-01
  • Publisher: Bloomberg Press

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Summary

Hedge funds have rightly gained the attention of private and institutional investors in recent years, proving themselves as useful portfolio diversifiers and preservers of wealth while greatly dispelling their reputation as an "unsafe" investment. Yet investors attempting to navigate in the field of hedge funds face significant challenges: the large number of funds, the diversity of strategies used, the range of financial instruments traded, and the various formats for investing. Pooling multiple hedge funds together into one vehicle, the fund of funds provides a ready solution, combining professional management expertise with asset allocation. In this book--the first of its kind--industry expert Joseph Nicholas shows investors how these funds operate, the benefits and risks, and the criteria and due diligence to utilize when selecting funds. Nicholas provides an in-depth analysis of historical fund performance and offers unique insight into the industry and trends that may affect its evolution. Clear, insightful, and illustrated with numerous charts and graphs, Hedge Fund of Funds Investing is an essential resource for serious investors.

Author Biography

Joseph G. Nicholas, JD, is founder and chairman of HFR Group, LLC, which includes HFR Asset Management, LLC, a fund-of-funds management company, HFR Europe, Ltd, an investment advisory firm, and Hedge Fund Research, Inc., a leading supplier of hedge fund data. Author of Investing in Hedge Funds and Market-Neutral Investing, he is a frequent lecturer and media expert on topics relating to alternative investments.

Table of Contents

Acknowledgments xiii
Introduction xv
Part 1 THE FUND OF FUNDS INDUSTRY
1 Fund of Funds in the Hedge Fund Industry
3(20)
Hedge Fund Investment Options
4(2)
Direct Investment
5(1)
Customized Portfolio
5(1)
Index Fund
6(1)
Fund of Funds Investment
6(1)
Growth of Funds of Funds
6(5)
Hedge Fund Industry Characteristics and Trends
11(3)
Hedge Fund Investment Structure
14(7)
Legal Structure
16(1)
Numbers of Investors and Minimum Investment Size
17(2)
Reporting and Disclosure
19(1)
Liquidity
19(2)
Lockup
21(1)
Summary
21(2)
2 Hedge Fund Investment Strategies
23(26)
Convertible Arbitrage
27(1)
Distressed Securities
28(2)
Emerging Markets
30(1)
Equity Hedge
31(2)
Equity Market Neutral
33(2)
Event Driven
35(2)
Fixed Income
37(2)
Macro
39(1)
Market Timing
40(1)
Merger Arbitrage
41(2)
Relative Value Arbitrage
43(1)
Sector Long/Short
44(1)
Short Selling/Short Bias
45(2)
Summary
47(2)
3 Fund of Funds Mechanics and the Two-Tiered Structure
49(16)
Structural Considerations
51(13)
Organization Structure
51(1)
Company Structure
51(1)
Domicile
52(1)
Subscriptions and Registration Exemptions
53(1)
Minimum Investment Size
53(2)
Fees
55(2)
Lockup, Redemption, and Liquidity
57(3)
The Fund of Funds Management Company
60(1)
Manager Due Diligence and Selection
61(1)
Risk Management
62(1)
Operations
62(1)
Performance and Exposure Reporting
63(1)
Summary
64(1)
4 Advantages and Disadvantages of Funds of Funds
65(16)
Advantages
66(9)
Diversification
66(1)
Due Diligence
67(1)
Risk Management
68(2)
Portfolio Management: Strategy Selection and Manager Selection
70(2)
Access to Funds/Capacity
72(1)
Consolidated Reporting
73(1)
Fees
74(1)
Performance
74(1)
Disadvantages
75(2)
Exposure to Other Investors' Cash Flows
75(1)
Fees
75(1)
Lack of Control/Customization
76(1)
Decreased Transparency
76(1)
Summary
77(4)
Part 2 HISTORICAL PERFORMANCE OF FUNDS OF FUNDS
5 Performance of Funds of Funds
81(26)
Fund of Funds Substrategien
84(3)
HFRI Fund of Funds Conservative Index
84(1)
HFRI Fund of Funds Strategic Index
85(1)
HFRI Fund of Funds Diversified Index
85(1)
HFRI Fund of Funds Market Defensive Index
86(1)
Fund of Funds Returns 1990-2002
87(3)
Fund of Funds Returns 2000-2002
88(2)
Fund of Funds Volatility 1990-2 002
90(3)
Fund of Funds Volatility 2000-2002
91(2)
Fund of Funds Return Versus Volatility 1990-2002
93(3)
Fund of Funds Risk-Adjusted Returns-The Sharpe Ratio
96(4)
Sharpe Ratio 1990-2002
97(2)
Sharpe Ratio 2000-2002
99(1)
Preservation of Capital 1990-2002
100(3)
Fund of Funds Performance Versus Equities
100(1)
Fund of Funds Performance During Bear and Bull Markets
101(2)
Average Performance During Negative Periods and Positive Periods 1990-2002
103(2)
Return Distribution 1990-2002
103(1)
Fund of Funds Performance During Periods of Market Stress
104(1)
Summary
105(2)
6 Fund of Funds in a Portfolio With Traditional Assets
107(16)
Linear Analysis of Returns
107(3)
Adding Funds of Funds to a Traditional Portfolio
110(8)
Achieving Superior Risk-Adjusted Returns
118(1)
Summary
118(5)
Part 3 A COMMONSENSE APPROACH TO SELECTING FUNDS OF FUNDS
7 Defining Objectives and Identifying Candidates
123(14)
Step 1: Define Objectives and Parameters
124(3)
Objectives
124(1)
Parameters
125(1)
Strategy Restrictions
126(1)
Structural Requirements
126(2)
Fund of Funds Objectives and Parameters Worksheet
128
Step 2: Screen to Create a Funds of Funds Short List
127(9)
HFRI Fund of Funds Conservative Index
130(1)
HFRI Fund of Funds Strategic Index
130(1)
HFRI Fund of Funds Diversified Index
131(1)
HFRI Fund of Funds Market Defensive Index
131(5)
Summary
136(1)
8 Issues in Due Diligence: The Fund of Funds Firm
137(18)
Background Information
138(9)
Staff Information
138(2)
Company Structure
140(1)
Asset Management Activities
141(6)
Product Information
147(4)
Performance
151(2)
Summary
153(2)
9 Issues in Due Diligence: Portfolio Management
155(16)
Asset Allocation/Style Selection
156(4)
Due Diligence Criteria in Manager Selection
160(4)
Portfolio Construction
164(6)
Summary
170(1)
10 Issues in Due Diligence: Risk Management
171(16)
IV Transparency and Separately Managed Accounts
172(6)
Transparency
172(3)
Managed Account Structures
175(1)
Pricing Risk Case Study: Lipper
176(1)
Style Drift Case Study: Integral
177(1)
Risk Management
178(5)
Compliance and Legal Issues
183(3)
Summary
186(1)
11 Fund of Funds Selection Case Study
187(10)
Scenario
187(8)
Step 1: Defining Investment Objectives and Parameters
188(1)
Step 2: Screening to Create the Funds of Funds Short List
189(1)
Step 3: Conducting a Due Diligence Screen of the Funds of Funds Short List
189(1)
Step 4: Evaluating Finalists for Selection
190(5)
Final Selections
195(1)
Summary
196(1)
Appendix A: AIMA Due Diligence Questionnaire 197(10)
Appendix B: Excerpts from HFR Fund of Funds Industry Report 207(46)
Index 253

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