Funds of Hedge Funds - 1st Edition - ISBN: 9780750679848, 9780080472829

Funds of Hedge Funds

1st Edition

Performance, Assessment, Diversification, and Statistical Properties

Authors: Greg N. Gregoriou
eBook ISBN: 9780080472829
Hardcover ISBN: 9780750679848
Imprint: Butterworth-Heinemann
Published Date: 18th July 2006
Page Count: 496
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Table of Contents

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


With about $450 billion in assets, funds of hedge funds are the most recent darling of investors. While hedge funds carry high risk for the promise of high returns they are designed for the very rich and for large institutional investors such as pension funds. A Fund of Hedge Funds (FOF) spreads investments among a number of hedge funds to reduce risk and provide diversification, while maintaining the potential for higher than average returns. Odds are that some pension fund of yours is invested heavily in these products, and more recently these FOFs have been opened to more and more individual investors in offshore jurisdictions with lower minimum entry levels. Since this is a new and extremely fast-moving financial phenomenon, academic research has just begun in earnest, and this is the first book to present rigorous academic research by some of the leading lights in academic finance, carefully analyzing the broad array of issues involved in FOFs.

Key Features

  • With over $450 billion in assets, hedge funds of funds are the darling of investors
  • First book to present rigorous academic research about funds of funds
  • Leading lights in academic finance from around the world analyze the broad array of issues involved in funds of funds


Primary audience: Researchers and academics in Finance.


No. of pages:
© Butterworth-Heinemann 2006
eBook ISBN:
Hardcover ISBN:


"Want to learn all about hedge funds and funds of hedge funds and sift out the truth from the misconceptions? Then read this comprehensive assessment of the field. It goes from A to Z in coverage and together all the papers provide a good course in this fast growing and controversial subject." -- William T. Ziemba, Alumni Professor of Financial Modeling and Stochastic Optimization (Emeritus), Sauder School of Business, University of British Columbia "Funds of hedge funds are fast emerging as one of the most popular alternative investment vehicles offering diversification, access to hedge funds that are closed for new investment, and due diligence. This great collection of research articles on funds of hedge funds will surely inform the readers about the pros and cons associated with investing in funds of hedge funds." -- Vikas Agarwal, Assistant Professor of Finance, J. Mack Robinson College of Business, Georgia State University "The international demand for hedge funds from institutional investors is gaining more and more momentum. As most of this growth can be attributed to funds of hedge funds, this excellent new edited book couldn’t be more timely. Again, the editor has done an outstanding job of gathering contributions of great academic and practical use from some of the leading authorities in this area often considered as opaque. Fund of Hedge Funds is the definitive source of information for industry professionals, institutional investors and academics alike. A more comprehensive analysis of the Performance, Application and Risk Management of fund of hedge funds is hard to come by." -- Dieter G. Kaiser, Institutional Research, Benchmark Alternative Strategies GmbH "According to TASS Tremont, the fraction of hedge funds that are funds of funds has doubled over the past five years, to 28 percent of all hedge funds as of September 2005. Attention must be paid. Academics have only just recently started to become interested in this business. This book of readings is one the first published collections of original scholarly papers on this subject. It is of great interest to many academics as well as of course to the many practitioners who are in the business today or who would very much like to enter the fund of funds business." -- Stephen J. Brown, David Loeb Professor of Finance, NYU Stern School of Business

About the Authors

Greg N. Gregoriou Author

A native of Montreal, Professor Greg N. Gregoriou obtained his joint Ph.D. in finance at the University of Quebec at Montreal which merges the resources of Montreal's four major universities McGill, Concordia, UQAM and HEC. Professor Gregoriou is Professor of Finance at State University of New York (Plattsburgh) and has taught a variety of finance courses such as Alternative Investments, International Finance, Money and Capital Markets, Portfolio Management, and Corporate Finance. He has also lectured at the University of Vermont, Universidad de Navarra and at the University of Quebec at Montreal.

Professor Gregoriou has published 50 books, 65 refereed publications in peer-reviewed journals and 24 book chapters since his arrival at SUNY Plattsburgh in August 2003. Professor Gregoriou's books have been published by McGraw-Hill, John Wiley & Sons, Elsevier-Butterworth/Heinemann, Taylor and Francis/CRC Press, Palgrave-MacMillan and Risk Books. Four of his books have been translated into Chinese and Russian. His academic articles have appeared in well-known peer-reviewed journals such as the Review of Asset Pricing Studies, Journal of Portfolio Management, Journal of Futures Markets, European Journal of Operational Research, Annals of Operations Research, Computers and Operations Research, etc.

Professor Gregoriou is the derivatives editor and editorial board member for the Journal of Asset Management as well as editorial board member for the Journal of Wealth Management, the Journal of Risk Management in Financial Institutions, Market Integrity, IEB International Journal of Finance, and the Brazilian Business Review. Professor Gregoriou's interests focus on hedge funds, funds of funds, commodity trading advisors, managed futures, venture capital and private equity. He has also been quoted several times in the New York Times, Barron's, the Financial Times of London, Le Temps (Geneva), Les Echos (Paris) and L'Observateur de Monaco. He has done consulting work for numerous clients and investment firms in Montreal. He is a part-time lecturer in finance at McGill University, an advisory member of the Markets and Services Research Centre at Edith Cowan University in Joondalup (Australia), a senior advisor to the Ferrell Asset Management Group in Singapore and a research associate with the University of Quebec at Montreal's CDP Capital Chair in Portfolio Management. He is on the advisory board of the Research Center for Operations and Productivity Management at the University of Science and Technology (Management School) in Hefei, Anhui, China.

Affiliations and Expertise

School of Business and Economics, State University of New York, Plattsburgh, NY, USA