Reconsidering Funds of Hedge Funds
1st Edition
The Financial Crisis and Best Practices in UCITS, Tail Risk, Performance, and Due Diligence
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Description
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
Readership
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
Editor
Contributors
Acknowledgments
Introduction
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
Conclusion
References
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
Conclusion
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
Chapter 6. Choice of Risk Measure in Evaluating UCITS Funds of Hedge Funds
6.1 Introduction
6.2 Literature Review
6.3 Empirical Analysis
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
References
Appendix
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
Conclusion
Acknowledgments
References
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
Conclusion
References
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
Conclusion
References
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
Conclusion
Appendix
References
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
Conclusion
Acknowledgments
References
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
Conclusion
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Annex
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
References
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
Conclusion
References
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
Conclusion
References
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)
Conclusion
References
Chapter 26. Crises and Funds of Hedge Funds Tail Risk
26.1 Introduction
26.2 Methodology
26.3 Empirical Results
Conclusion
References
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
Conclusion
References
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
Conclusion
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
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
Conclusion
Acknowledgments
References
Index
Details
- No. of pages:
- 592
- Language:
- English
- Copyright:
- © Academic Press 2013
- Published:
- 23rd January 2013
- Imprint:
- Academic Press
- Hardcover ISBN:
- 9780124016996
- eBook ISBN:
- 9780124045941
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
Reviews
"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