Funds of Hedge Funds

1st Edition

Performance, Assessment, Diversification, and Statistical Properties

Print ISBN: 9780750679848
eBook ISBN: 9780080472829
Imprint: Butterworth-Heinemann
Published Date: 18th July 2006
Page Count: 496
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Institutional Access


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.

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 Expe


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"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 Septe