Reconsidering Funds of Hedge Funds - 1st Edition - ISBN: 9780124016996, 9780124045941

Reconsidering Funds of Hedge Funds

1st Edition

The Financial Crisis and Best Practices in UCITS, Tail Risk, Performance, and Due Diligence

Editors: Greg N. Gregoriou
eBook ISBN: 9780124045941
Hardcover ISBN: 9780124016996
Imprint: Academic Press
Published Date: 23rd January 2013
Page Count: 592
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How will the funds of hedge funds (FoHF) business have to change to survive in the wake of the 2008-2012 financial crisis? This new research provides valuable insight. Reconsidering Funds of Hedge Funds presents the first comprehensive views of UCITS as well as recent trends in due diligence, risk management, and hedge fund deaths and survivors. The book contains original chapters by 22 academics and 16 hedge fund professionals, and includes two sections on performance: one that looks at UCITS FoHF and one that deals with traditional FoHF performance. Most chapters examine aspects of the 2008-2012 financial crisis, and almost every chapter addresses fund of hedge funds' management process before, during, and after the crisis.

Key Features

  • Covers recent advances in risk management, due diligence, tail risk, and allocation
  • Presents an in-depth analysis of UCITs
  • Balances academic and professional viewpoints


Upper-division undergraduates, graduate students, and professors studying financial risk management, investments, and investment market trends.  Financial industry professionals working on both the buy- and sell-sides of investment firms

Table of Contents






Section 1 Due Diligence and Risk Management

Section 2 UCITS Performance

Section 3 Performance

Section 4 Fund of Hedge Fund Alpha

Section 5 Tail Risk

Section 6 Regulation

Chapter 1. After the Crisis: The Withering of the Funds of Hedge Funds Business?

1.1 Introduction

1.2 Institutional versus Private Investor FoHFs

1.3 The Bubble Bursts

1.4 The Aftermath of Crisis

1.5 The Excess Cash Problem

1.6 Could FoHFs Problems Have Been Prevented?

1.7 The Role of Performance Decay

1.8 Outlook



Section 1: Due Diligence and Risk Management

Chapter 2. Evaluating Trends in Funds of Hedge Funds Operational Due Diligence

2.1 Introduction

2.2 Increased Focus on Operational Due Diligence

2.3 Chapter Goals

2.4 What is Operational Risk?

2.5 The Different Types of Operational Risk

2.6 Operational Risk in a FoHFs Context

2.7 FoHFs Operational Due Diligence Frameworks

2.8 The Madoff Effect

2.9 Deep-Dive Operational Due Diligence

2.10 Broadening Scope Reviews and Declining Checklist Approaches

2.11 The Increasing Role of Operational Due Diligence Consultants



Chapter 3. The Limits of UCITS for Funds of Hedge Funds

3.1 Introduction

3.2 The UCITS Industry

3.3 Challenges for a UCITS FoHFs Manager

3.4 Performances




Recommended Reading

Chapter 4. Due Diligence: Lessons from the Global Financial Crisis for Funds of Hedge Funds with Particular Emphasis on the Asia–Pacific Region

4.1 Introduction

4.2 Due Diligence when Investing in a Hedge Fund

4.3 Investment in a FoHF and Due Diligence

4.4 Asia–Pacific Hedge Fund and FoHFs Growth and Performance

4.5 Before the GFC

4.6 Collapse: 2008

4.7 After the Storm

4.8 The Requirements of Due Diligence in a Post-GFC Environment




Chapter 5. The Use of Managed Accounts by Funds of Hedge Funds

5.1 Adversities of Funds of Hedge Funds in 2008

5.2 MAC Structures for FoHFs

5.3 Hypotheses, Advantages, and Disadvantages of MACs

5.4 Survey

5.5 Summary




Chapter 6. Choice of Risk Measure in Evaluating UCITS Funds of Hedge Funds

6.1 Introduction

6.2 Literature Review

6.3 Empirical Analysis




Section 2: UCITS Performance

Chapter 7. UCITS Funds of Hedge Funds – The New Panacea?

7.1 Introduction

7.2 Fund Structures

7.3 Investment Managers

7.4 Funds Liquidity and Fees

7.5 Return and Risk Analysis




Chapter 8. The Return Potential of UCITS Funds of Hedge Funds: An Analysis of their Investment Universe

8.1 Introduction

8.2 Descriptive Comparison of the UCITS versus the Offshore Hedge Fund Universe

8.3 Performance Comparison of Simulated UCITS FoHFs versus Offshore FoHFs Portfolios



Chapter 9. How Geography, Flows, and Size Affect the Risk-Adjusted Performance of UCITS III Funds of Hedge Funds

9.1 Introduction

9.2 Literature Review

9.3 Data

9.4 Performance of and Flows into UCITS FoHFs

9.5 Risk Analysis




Chapter 10. Funds of Hedge Funds versus Do-It-Yourself Funds of UCITS

10.1 Introduction

10.2 Issues with Hedge Fund Investing – The Case of FoHFs

10.3 Testing for Non-Linearities in Hedge Fund Returns – A New Approach

10.4 UCITS-Compliant Hedge Funds as a Fit for FoHFs Construction

10.5 Regulatory Risks Around UCITS Hedge Funds




Section 3: Performance

Chapter 11. Predicting Funds of Hedge Funds Attrition Through Performance Diagnostics

11.1 Introduction

11.2 Data and Variable Construction

11.3 The Treatment of Performance Measures

11.4 Linking Fund Performance to Subsequent Attrition




Chapter 12. Does Funds of Hedge Funds Size Matter? Size versus Performance Before, During, and After the Crisis

12.1 Backdrop

12.2 FoHFs Post the 2008 Financial Crisis

12.3 Performance




Chapter 13. Normalized Risk-Adjusted Performance Measures Revisited: The Performance of Funds of Hedge Funds Before and After the Crisis

13.1 Introduction

13.2 Theoretical Framework

13.3 Data and Empirical Method



Chapter 14. The Impact of the 2008 Financial Crisis on Funds of Hedge Funds

14.1 Introduction

14.2 Data and Sample Statistics

14.3 Changes in AUM During the 2008 Financial Crisis

14.4 Asset Size and FOHFS Performance During the 2008 Financial Crisis

14.5 Diversification and FoHFs Performance During the 2008 Financial Crisis

14.6 Risk Factor Estimates of FoHFs Pre- and Post-2008 Financial Crisis

14.7 Attrition Rates and FoHFs Survival Analysis



Chapter 15. Forecasting Funds of Hedge Funds Performance: A Markov Regime-Switching Approach

15.1 Introduction

15.2 Data

15.3 Forecasting Models

15.4 Results




Chapter 16. A Panel-Based Quantile Regression Analysis of Funds of Hedge Funds

16.1 Introduction

16.2 Panel Data Analysis and Quantile Regression

16.3 Data and Methodology

16.4 Discussion of the Results




Section 4: Fund of Hedge Fund Alpha

Chapter 17. Reward-to-Risk Ratios of Funds of Hedge Funds

17.1 Introduction

17.2 Methodology

17.3 Data and Descriptive Statistics

17.4 Empirical Results



Chapter 18. The Short-Run Performance Persistence in Funds of Hedge Funds

18.1 Introduction

18.2 Data

18.3 Time Variation in FoHFs Risk Exposure

18.4 Time Variation in Performance

18.5 Back-Test on Short-Run Performance Persistence




Chapter 19. ‘Seeking Alpha’: The Performance of Funds of Hedge Funds

19.1 Introduction

19.2 Theoretical Approaches to Model Hedge Fund Returns

19.3 Regression Analysis

19.4 Results




Chapter 20. Quantitative Insight into Management of Funds of Hedge Funds and Consequences on Fund Alpha Performance

20.1 Introduction

20.2 Principal Components Analysis

20.3 Data and the Nature of the First Two Principal Components

20.4 Classification and Alpha Performance Evaluation in the Recent Financial Crisis

20.5 The ‘Pro-Active’ Nature of FoHFs

20.6 The Story of the Financial Crisis of 2008–2009 and Subsequent Developments




Chapter 21. Selecting Top Funds of Hedge Funds Based on Alpha and Other Performance Measures

21.1 Introduction and Literature Review

21.2 Impact of the Subprime Crisis

21.3 Performance Metrics

21.4 Summary Statistics of FoHFs Before and After the Subprime Crisis

21.5 How Does One Select ‘Elite’ FoHFs?

21.6 Identified FoHFs Managers with Genuine Skill

21.7 Out-of-Sample Performance of In-Sample ‘Elite’ FoHFs Funds




Chapter 22. Funds of Hedge Funds Strategies and Implications for Asset Management: Is Diversification Enough?

22.1 Introduction and Literature Review

22.2 Data

22.3 Factor Model (Risk Factors)

22.4 Portfolio Allocation with Hedge Funds and FoHFs

22.5 Certainty Equivalence and Portfolio Allocation with FoHFs



Section 5: Tail Risk

Chapter 23. The Intertemporal Relation between Tail Risk and Funds of Hedge Funds Returns

23.1 Introduction

23.2 Data and Methodology

23.3 Empirical Results



Chapter 24. Tail Risk Protection for Funds of Hedge Funds

24.1 Introduction

24.2 VIX, VIX Futures, VIX Options, and the VVIX

24.3 Tail Risk Hedging

24.4 Tail Risk Protection for FoHFs



Chapter 25. Autocorrelation, Bias, and Fat Tails: An Analysis of Funds of Hedge Funds

25.1 Introduction

25.2 Data and Strategies

25.3 Classical Performance Measurement

25.4 Problems of Classic Performance Measurement

25.5 Integrating the Problems in Performance Measurement

25.6 Adjusted Hedge Fund Performance Measurement

25.7 Analysis of Subperiods (Pre-Crisis and Post-Crisis)



Chapter 26. Crises and Funds of Hedge Funds Tail Risk

26.1 Introduction

26.2 Methodology

26.3 Empirical Results



Chapter 27. Funds of Hedge Funds, Efficient Portfolios, and Investor Clienteles: Empirical Evidence from Growth and Financial Crisis Periods

27.1 Introduction

27.2 Literature Review

27.3 Data

27.4 Methodology

27.5 Empirical Results



Section 6: Regulation

Chapter 28. Regulation: Threat or Opportunity for the Funds of Hedge Funds Industry?

28.1 Introduction

28.2 FoHFs and Solvency II

28.3 Fine-Tuning Solvency II Standard Formula

28.4 An Application to FoHFs



Chapter 29. Funds of Hedge Funds and the Principles of Fiduciary Investing Following the Global Financial Crisis

29.1 Introduction

29.2 The Principles of Fiduciary Investing

29.3 Prudent Investing

29.4 Investing in FoHFs




Chapter 30. Understanding the Regulation Impact: US Funds of Hedge Funds After the Crisis

30.1 Introduction

30.2 The Regulatory and Intervention Debate: Looking to the Economists

30.3 Lessons From Other Industries

30.4 The Road to Dodd–Frank

30.5 Dodd–Frank

30.6 US Funds and the AIFM Directive

30.7 FoHFs Trends During and After the GFC




Chapter 31. Canada and Australia: Do They Provide a Regulatory Model for Funds of Hedge Funds?

31.1 Introduction

31.2 FoHFs Statistical Comparisons Between Australia and Canada

31.3 FoHFs Regulation




Chapter 32. South African Regulatory Reforms of Funds of Hedge Funds

32.1 Introduction

32.2 The Investment Climate in South Africa

32.3 FoHFs in South Africa

32.4 Key Considerations for Investors in South African FoHFs

32.5 Regulation Impacting on South African FoHFs






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© Academic Press 2013
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About the Editor

Greg N. Gregoriou

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


"International contributors include 22 academics in finance, business, and research analysis, and 16 hedge fund professionals. They examine issues related to the institutional framework of a special type of FOHF called undertakings for collective investments in transferable securities (UCITS) FOHFs, which were developed in response to calls for operational due diligence and improved transparency in the financial industry." --Reference and Research Book News, December 2013

"Hedge funds are now more than ever in the focus of many public debates and they are discussed by academics and practitioners as well. So the time for treating the diverse aspects of hedge funds in a book could not even be better. The book at hand by Greg N. Gregoriou will surely be a very valuable and readable contribution in this context as it covers the complete, difficult matter in its manyfold chapters and through the high expertise of the authors." --Carsten S. Wehn, DekaBank, Germany

"The 2007-9 Financial Markets Crisis also created a crisis for the fund of hedge funds industry.  After the Crisis, basics such as liquidity, transparency, alpha generation, and understanding business risks gained renewed importance.  Solutions to these criteria such as UCITS, managed accounts, and closer management of fund asset and liability risks became central to many fund of hedge funds.  Additionally, leading fund of hedge funds now focus less on 'one size fits all' solutions and more on bespoke client portfolio solutions.  The articles in Reconsidering Funds of Hedge Funds try to grapple with these industry changes and show a variety of different responses to the new environment.  Fund of hedge fund investors will find this book and important update on an industry in transition." --James Purnell, Kenmar, USA

"We have witnessed tremendous growth in the intermediation in the hedge fund industry in the form of funds of hedge funds. However, there is still limited understanding about the risks and rewards as well as regulation of these intermediaries especially in light of the recent financial crisis. This book is a great collection of research articles that will improve the understanding of anyone interested in funds of hedge funds." --Vikas Agarwal, Georgia State University

"If your investment in fund of hedge funds suffered from the 2007-09 financial crisis, this book is the first to provide you with valuable insights into the measurement and effective management of various types of risk. It is the major resource for scholars and professionals interested in state-of-the-art approaches on operational due diligence and risk management." --Roland Füss, University of St.Gallen