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Handbook of Hedge Funds

Handbook of Hedge Funds

François-Serge Lhabitant

ISBN: 978-0-470-02663-2

Jan 2007

654 pages

In Stock

$235.00

Description

A comprehensive guide to the burgeoning hedge fund industry

Intended as a comprehensive reference for investors and fund and portfolio managers, Handbook of Hedge Funds combines new material with updated information from Francois-Serge L’habitant’s two other successful hedge fund books. This book features up-to-date regulatory and historical information, new case studies and trade examples, detailed analyses of investment strategies, discussions of hedge fund indices and databases, and tips on portfolio construction.

Francois-Serge L’habitant (Geneva, Switzerland) is the Head of Investment Research at Kedge Capital. He is Professor of Finance at the University of Lausanne and at EDHEC Business School, as well as the author of five books, including Hedge Funds: Quantitative Insights (0-470-85667-X) and Hedge Funds: Myths & Limits (0-470-84477-9), both from Wiley.

Foreword by Mark Anson xv

1 Introduction 1

PART I HEDGE FUND OVERVIEW

2 History Revisited 7

2.1 The very early years: The 1930s 7

2.2 The formative years (1949–1968) 8

2.3 The dark ages (1969–1974) 11

2.4 The renaissance (1975–1997) 12

2.5 The Asian and Russian crises (1997–1998) 15

2.6 The equity bubble years 18

2.7 Hedge funds today 19

2.8 The key characteristics of modern hedge funds 24

2.9 The future 35

3 Legal Environment 37

3.1 The situation in the US 39

3.2 The situation in Europe 59

3.3 The situation in Asia 81

3.4 Internet and the global village 81

4 Operational and Organizational Structures 85

4.1 Legal structures for stand-alone funds 85

4.2 A network of service providers 90

4.3 Specific investment structures 108

4.4 Disclosure and documents 118

5 Understanding the Tools Used by Hedge Funds 121

5.1 Buying and selling using a cash account 121

5.2 Buying on margin 122

5.3 Short selling and securities lending 126

5.4 Derivatives 142

5.5 Leverage 151

PART II HEDGE FUND STRATEGIES AND TRADE EXAMPLES

6 Introduction 159

7 Long/Short Equity Strategies 163

7.1 The mechanics of long/short equity investing 163

7.2 Investment approaches 170

7.3 Historical performance 181

8 Dedicated Short 187

8.1 The pros and cons of dedicated short selling 187

8.2 Typical target companies and reactions 188

8.3 Historical performance 193

9 Equity Market Neutral 197

9.1 Definitions of market neutrality 197

9.2 Examples of equity market neutral strategies and trades 203

9.3 Historical performance 211

10 Distressed Securities 215

10.1 Distressed securities markets 215

10.2 Distressed securities investing 226

10.3 Examples of distressed trades 233

10.4 Historical performance 239

11 Merger Arbitrage 243

11.1 Mergers and acquisitions: a historical perspective 243

11.2 Implementing merger arbitrage: basic principles 246

11.3 The risks inherent in merger arbitrage 254

11.4 Historical performance 263

12 Convertible Arbitrage 269

12.1 The terminology of convertible bonds 269

12.2 Valuation of convertible bonds 272

12.3 Convertible arbitrage: the basic delta hedge strategy 279

12.4 Convertible Arbitrage in practice: stripping and swapping 285

12.5 The strategy evolution 287

12.6 Historical performance 293

13 Fixed Income Arbitrage 297

13.1 The basic tools of fixed income arbitrage 297

13.2 Examples of sub-strategies 299

13.3 Historical performance 306

14 Emerging Markets 311

14.1 The case for emerging market hedge funds 311

14.2 Examples of strategies 314

14.3 Historical performance 323

15 Global Macro 327

15.1 Global macro investment approaches 327

15.2 Examples of global macro trades 328

15.3 Historical performance 346

16 Managed Futures and Commodity Trading Advisors (CTAs) 351

16.1 The various styles of managed futures 352

16.2 Examples of systematic trading rules 355

16.3 Historical Performance 366

16.4 The future of managed futures 370

17 A Smorgasbord of Other Strategies 373

17.1 Capital structure arbitrage and credit strategies 373

17.2 Weather derivatives, weather insurance and catastrophe bonds 381

17.3 Mutual Fund Arbitrage 382

17.4 Arbitraging between NAVs and quoted price: Altin AG 388

17.5 Split strike conversion 390

17.6 Event-Driven Special Situations 392

17.7 Cross-listing and dual-listing arbitrage 393

17.8 From public to private equity 395

17.9 Regulation D and PIPEs funds 397

17.10 IPO Lock-up Expirations 398

PART III MEASURING RETURNS, RISKS AND PERFORMANCE

18 Measuring Net Asset Values and Returns 403

18.1 The difficulties of obtaining information 404

18.2 Equalization, crystallization and multiple share classes 406

18.3 The inequitable allocation of incentive fees 406

18.4 The free-ride syndrome 407

18.5 Onshore versus Offshore Funds 408

18.6 The multiple share approach 409

18.7 The equalization factor/depreciation deposit approach 410

18.8 Simple Equalization 414

18.9 Consequences for performance calculation 414

18.10 The holding period return 415

18.11 Annualizing 417

18.12 Multiple hedge fund aggregation 418

18.13 Continuous compounding 419

19 Return Statistics and Risk 423

19.1 Calculating return statistics 423

19.2 Measuring risk 429

19.3 Downside risk measures 439

19.4 Benchmark-related statistics 447

20 Risk-Adjusted Performance Measures 451

20.1 The Sharpe ratio 455

20.2 The Treynor ratio and Jensen alpha 460

20.3 M2, M3 and Graham–Harvey 468

20.4 Performance measures based on downside risk 472

20.5 Conclusions 476

21 Databases, Indices and Benchmarks 479

21.1 Hedge fund databases 479

21.2 The various biases in hedge fund databases 479

21.3 From databases to indices 487

21.4 From indices to benchmarks 508

PART IV INVESTING IN HEDGE FUNDS

22 Introduction 515

23 Revisiting the Benefits and Risks of Hedge Fund Investing 517

23.1 The benefits of hedge funds 518

23.2 The benefits of individual hedge fund strategies 527

23.3 Caveats of hedge fund investing 534

24 Asset Allocation and Hedge Funds 537

24.1 Diversification and portfolio construction: an overview 537

24.2 Strategic asset allocation without hedge funds 543

24.3 Introducing hedge funds in the asset allocation 547

24.4 How much should be allocated to hedge funds? 551

24.5 Hedge funds as portable alpha overlays 561

24.6 Hedge funds as sources of alternative risk exposure 564

24.7 Risk budgeting and the separation of alpha from beta 565

25 Hedge Fund Selection: A Route Through the Maze 569

25.1 Stating objectives 569

25.2 Filtering the universe 570

25.3 Quantitative Analysis 571

25.4 Qualitative Analysis 572

25.5 Due Diligence: between art and science 573

25.6 Ongoing monitoring 576

25.7 Common mistakes in the selection process 577

26 Funds of Hedge Funds 579

26.1 What are funds of hedge funds? 579

26.2 Advantages of funds of funds 579

26.3 The dark side of funds of funds 584

26.4 Selecting a fund of funds 587

26.5 Fund allocation: A look inside the “black box” 588

26.6 The future of funds of funds 589

27 Structured Products on Hedge Funds 591

27.1 Total return swaps linked to hedge funds 591

27.2 Call options on hedge funds 592

27.3 Basic notes and certificates 593

27.4 Capital protected notes 594

27.5 The second generation: The option-based approach 598

27.6 The third generation: the dynamic trading approach 602

27.7 The fourth generation: options on CPPI 608

27.8 The flies in the ointment 608

27.9 The future of capital guaranteed products 610

27.10 Collateralized hedge fund obligations 610

28 Conclusions 615

Bibliography 617

Index 625