Managing Hedge Fund Managers Quantitative and Qualitative Performance Measures

by Stavetski, E. J.

• ISBN13: 9780470197592
• ISBN10: 0470197595
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-03-30
• Publisher: Wiley

Summary

Invaluable insight into measuring the performance of today's hedge fund manager More and more institutional funds and high'net'worth assets are finding their way to hedge funds. This book provides the quantitative and qualitative measures and analysis that investment managers, investment advisors, and fund of fund managers need to allocate and monitor their client's assets properly. It addresses important topics such as Modern Portfolio Theory (MPT) and Post Modern Portfolio Theory (PMPT), choosing managers, watching performance, and researching alternate asset classes. Author Edward Stavetski also includes an appendix showing detailed case studies of hedge funds, and gives readers a road map to monitor their investments. Edward J. Stavetski (Wayne, PA) is Director of Investment Oversight for Wilmington Family Office, serving ultra high'net'worth families in strategic asset allocation, traditional and alternative investment manager selection, and oversight.

Author Biography

EDWARD J. STAVETSKI is Director of Investment Oversight and Chair of the Investment Committee for the Wilmington Family Office. He is an active member of the CFA Institute and served as a board member and past president of the CFA Society of Philadelphia, Inc. Stavetski was a regular contributor to TheStreet.com, Investopedia, and RealMoney. He received his bachelor of arts in chemistry from West Virginia University and has held NASD Series 7, 63, and 65 licenses.

Table of Contents

Preface	p. xi
Highlights of the Book	p. xii
Acknowledgments	p. xiii
Introduction: The Art and Science of Hedge Fund Investing-Are You Precisely Wrong or Approximately Correct?	p. 1
The Explosion of Hedge Funds	p. 1
What Are Hedge Funds?	p. 5
Finding a Comfort Zone	p. 7
A Look beneath the (Book) Covers	p. 8
As You Begin	p. 9
Madoff	p. 10
Asset Allocation and Fiduciary Duty	p. 11
Determinants of Portfolio Performance	p. 12
Why Alternate Investments?	p. 13
A Closer Look at Hedge Fund Structures	p. 16
The Rise of Socially Responsible Investing	p. 20
Fiduciary Responsibility	p. 20
Where Do I Start?	p. 24
Large versus Small Funds	p. 27
Research Confirms Small Fund Advantage	p. 29
Performance of New Small Funds	p. 34
Attrition Rates	p. 36
Drivers of Outperformance	p. 37
Invested Interests	p. 37
Aligned Interests	p. 38
Point of Diminishing Returns	p. 39
Master of Trend Line Analysis	p. 40
The Search for an Honest Man	p. 41
Prime Brokers	p. 43
Conferences and Industry Events	p. 45
Industry Publications	p. 46
Incubators and Platforms	p. 47
Industry Web Sites and Databases	p. 48
Building Your Own Database	p. 53
Unconventional Sources	p. 53
Six Steps to Kevin Bacon	p. 54
Sizing up the Flock	p. 56
What's in the DDQ?	p. 57
Summary	p. 60
Performance Analysis	p. 61
The First Step: Understand What Is Being Measured	p. 63
Two Sides to Hedge Fund Performance: Long and Short	p. 65
Performance Standards	p. 66
Check the Entry	p. 67
Finding a Benchmark	p. 68
Peer Analysis	p. 71
Confusion from the Best and the Brightest?	p. 73
A Practitioner's View	p. 74
Examine the Bad	p. 77
Examine the Good	p. 78
Expect the Improbable	p. 79
I Surrender	p. 79
Risk in Hedge Funds	p. 81
Major Risk Categories	p. 84
Liquidity Risk	p. 85
High Watermark Risk	p. 87
Concentration Risk	p. 89
Operational Risk	p. 89
Liquidity Mismatch Risk	p. 90
Transparency Risk	p. 90
Risk Process	p. 91
Leverage Risk	p. 91
Short Selling Risk	p. 92
Reputation Risk	p. 93
Submerged Risk	p. 94
Counterparty Risk	p. 94
Market Risk	p. 94
Credit Risk	p. 95
Model Risk	p. 96
Complexity Risk	p. 98
Key Person Risk	p. 99
Sensitivity to Assumptions Risk	p. 99
NAV Instability Risk	p. 99
Derivatives Risk	p. 100
Summary	p. 101
You Only Find Out Who Is Swimming Naked When the Tide Goes Out	p. 103
Filling Out the DDQ	p. 103
Form ADV Part II	p. 109
Fund Brochures and Documents	p. 110
Planning the On-Site Visit	p. 111
Summary	p. 112
Let the Games Begin	p. 115
The Process	p. 115
Examining the Organization	p. 119
Preparing for the On-Site Visit	p. 120
Preparing the Final Evaluation	p. 126
In Conclusion	p. 137
Getting Ready Is the Secret of Success	p. 139
Top-Down Strategy Analysis	p. 140
Bottom-Up Manager Analysis	p. 141
Test or Model the Portfolio	p. 142
Portfolio Optimization	p. 147
Summary	p. 153
Navigating Buyers' Remorse	p. 155
Long Term Capital Management: Poor Diversification and High Leverage Are a Dangerous Combination	p. 156
Bayou Group, LLC: Due Diligence Is a Must	p. 158
Wood River Capital Management: A Lack of Experience and Auditing	p. 160
MotherRock: The Liquidity Squeeze in a Small Market Will End Badly When Volatility Increases	p. 162
Amaranth: Liquidity and Concentrated Portfolios Can Drag a Fund Down as the Trend of Any Trade Eventually Reverses	p. 165
Recent Events: Ospraie Fund	p. 168
Your Final Exam	p. 169
Applying Your Education	p. 170
The Importance of Second Acts	p. 171
Monitoring Your Flock	p. 173
Everyone's Favorite Metric: Performance	p. 174
Portfolio Exposures	p. 175
Performance Trends	p. 179
Peer Group Analysis	p. 181
Strategy Reviews	p. 182
Fund Size and Performance Impact	p. 183
Management and Personnel Reviews	p. 185
Third-Party Vendors	p. 186
Regulatory and Legal Risk	p. 188
Business Continuity Risk	p. 188
A Final Word on Monitoring	p. 189
Sample Investment Policy Statement	p. 191
Statement of Investment Objectives	p. 191
Asset Allocation and Rebalancing	p. 192
Guidelines for the Selection of Fixed-Income Securities	p. 195
Guidelines for Selection of Equity Investments	p. 196
Standards of Performance	p. 196
Selection of Managers	p. 199
Responsibilities of Managers	p. 200
Sample ADV Part II with ADV Schedule F	p. 203
Hedge Fund Manager Due Diligence Questionnaire	p. 219
Background	p. 219
Investment Process, Strategy, and Philosophy	p. 221
Business Plans	p. 221
Manager Selection and Research	p. 222
Manager Monitoring and Risk Management	p. 222
Performance and Fees	p. 222
Compliance and Client Reporting	p. 223
Personnel	p. 223
Operations and Administration	p. 223
Taxes	p. 224
Performance (See Appendix 6)	p. 224
Attachments	p. 226
U.S. Equity Long/Short Managers	p. 229
Organization	p. 229
Investment Professionals (Product Specific)	p. 230
Investment Philosophy and Process	p. 231
Trading Process and Systems	p. 232
Performance	p. 233
Composite/Product Information	p. 244
References	p. 248
Bibliography	p. 249
Index	p. 253
Table of Contents provided by Ingram. All Rights Reserved.