Managing Hedge Fund Managers: Quantitative and Qualitative Performance Measures
More and more institutional funds and high-net-worth assets are finding their way to hedge funds. This book provides the quantitative and qualitative measures and analysis that investment managers, investment advisors, and fund of fund managers need to allocate and monitor their client's assets properly. It addresses important topics such as Modern Portfolio Theory (MPT) and Post Modern Portfolio Theory (PMPT), choosing managers, watching performance, and researching alternate asset classes. Author Edward Stavetski also includes an appendix showing detailed case studies of hedge funds, and gives readers a road map to monitor their investments.
Edward J. Stavetski (Wayne, PA) is Director of Investment Oversight for Wilmington Family Office, serving ultra high-net-worth families in strategic asset allocation, traditional and alternative investment manager selection, and oversight.
Highlights of the Book.
The Art and Science of Hedge Fund Investing—Are You Precisely Wrong or Approximately Correct?
The Explosion of Hedge Funds.
What are Hedge Funds?
Finding a Comfort Zone.
A Look beneath the (Book) Covers.
As You Begin.
Chapter 1. Asset Allocation and Fiduciary Duty.
Investment Policy Statement: The Roadmap.
Determinants of Portfolio Performance.
Why Alternate Investments?
A Closer Look at Hedge Fund Structures.
The Rise of Socially Responsible Investing.
Where Do I Start?
Chapter 2. Large Versus Small Funds.
Good Things in Small Packages.
Research Confirms Small Fund Advantage.
Performance of New Small Funds.
Drivers of Outperformance.
Point of Diminishing Returns.
Master of Trend line Analysis.
Chapter 3. The Search for an Honest Man.
Finding Your Manager.
Conferences and Industry Events.
Incubators and Platforms.
Industry Websites and Databases.
Building Your Own Database.
Six Steps to Kevin Bacon.
Sizing up the Flock.
What's in the DDQ?
Chapter 4. Performance Analysis.
Torturing the Numbers Until They Confess.
The First Step: Understand What Is Being Measured.
Two Sides to Hedge Fund Performance: Long and Short.
Check the Entry
Finding a Benchmark
Confusion from the Best and the Brightest?
A Practitioners View.
Examine the Bad.
Examine the Good.
Expect the Improbable.
Chapter 5. Risk in Hedge Funds.
Risk Is Like the Weather: Everyone Talks About It, but No One Does Anything About It.
Major Risk Categories.
High Watermark Risk.
Liquidity Mismatch Risk.
Short Selling Risk.
Key Person Risk.
Sensitivity to Assumptions Risk.
NAV Instability Risk.
Chapter 6. You Only Find out Who Is Swimming Naked When the Tide Goes Out.
Look Behind the Numbers.
Filling out the DDQ.
Form ADV Part II.
Fund Brochures and Documents.
Planning the On-Site Visit.
Chapter 7. Let the Games Begin.
The Due Diligence Process.
Examining the Organization.
Preparing for the On-Site Visit.
Preparing the Final Evaluation.
Chapter 8. Getting Ready is the Secret to Success.
Top-Down Strategy Analysis.
Bottom-up Manager Analysis.
Test or Model the Portfolio.
Chapter 9. Navigating Buyers Remorse.
It's Always Darkest Before It Goes Completely Black.
Long Term Capital Management: Poor Diversification and High Leverage Are a Dangerous Combination.
Bayou Group, LLC: Due Diligence is a Must.
Wood River Capital Management: A Lack of Experience and Auditing.
MotherRock: The Liquidity Squeeze in a Small Market Will End Badly When Volatility Increases.
Amaranth: Liquidity and Concentrated Portfolios Can Drag a Fund down as Trend of Any Trade Eventually Reverses.
Recent Events: Ospraie Fund.
Your Final Exam.
Applying Your Education.
The Importance of Second Acts.
Chapter 10. Monitoring Your Flock.
I Walk in the Valley Darkness, I Fear No Evil.
Everyone's Favorite Metric: Performance.
Peer Group Analysis.
Fund Size and Performance Impact.
Management and Personnel Reviews.
Third Party Vendors.
Regulatory and Legal Risk.
Business Continuity Risk.
A Final Word on Monitoring.
Appendix A. Sample Investment Policy Statement.
Investment Policy Statement for Wilmington Family Office.
I. Statement of Investment Objectives.
II. Asset Allocation & Rebalancing.
III. Guidelines for the Selection of Fixed-Income Securities.
IV. Guidelines for Selection of Equity Investments.
V. Standards of Performance.
VI. Selection of Managers.
VII. Responsibilities of Managers.
Appendix B. Sample ADV Part II with ADV Schedule F.
Appendix C. Hedge Fund Manager Due Diligence Questionnaire.
II. Investment Process, Strategy, and Philosophy.
III. Business Plans.
IV. Manager Selection and Research.
V. Manager Monitoring and Risk Management.
VI. Performance and Fees.
VII. Compliance and Client Reporting.
IX. Operations and Administration.
XI. Performance (See Attached – Appendix 6).
Appendix D. U.S. Equity Long/Short Managers.
B. Investment Professionals (Product Specific).
C. Investment Philosophy and Process.
D. Trading Process and Systems.
F. Composite/Product Information.