Reconsidering Funds of Hedge Funds

Reconsidering Funds of Hedge Funds

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

1st Edition - December 31, 2012

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  • Editor: Greg Gregoriou
  • Hardcover ISBN: 9780124016996
  • eBook ISBN: 9780124045941

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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

  • Foreword





    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





Product details

  • No. of pages: 592
  • Language: English
  • Copyright: © Academic Press 2013
  • Published: December 31, 2012
  • Imprint: Academic Press
  • Hardcover ISBN: 9780124016996
  • eBook ISBN: 9780124045941

About the Editor

Greg Gregoriou

Greg 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

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