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Fund of Funds Investing: A Roadmap to Portfolio Diversification

Book Description

Valuable guidance on fund of funds investing

While capital markets have become more complex, investors are still looking to increase portfolio performance without increasing risk. Fund of funds investing is one such avenue to pursue. This practical guide provides you with the tools needed to understand and evaluate your investments in this often opaque area of finance. In Fund of Funds Investing, hedge fund expert Daniel Strachman and fund of funds manager Richard Bookbinder offer valuable insights into this world through an industry overview and review of essential issues including due diligence, risk and portfolio management, and multi-strategy funds.

  • Outlines strategies that will help you invest directly in a wide range of hedge funds

  • Other titles by Strachman: The Fundamentals of Hedge Fund Management, Essential Stock Picking Strategies, The Long and Short of Hedge Funds, Julian Robertson, and Getting Started in Hedge Funds, Second Edition

  • Based on extensive interviews by the authors as well as their experiences in this field

Funds of Funds Investing is an important guide to one of the most misunderstood areas of modern finance.

Table of Contents

  1. Copyright
  2. Acknowledgments
  3. Introduction
  4. 1. On the Road
    1. 1.1. THE MODERN HEDGE FUND INDUSTRY
    2. 1.2. WHERE HEDGE FUNDS CAME FROM
    3. 1.3. THREE WISE MEN
    4. 1.4. SOPHISTICATED INVESTORS
    5. 1.5. HEDGE FUND BOOM TIME
      1. 1.5.1. The Birth of Alternative Investments
    6. 1.6. WHY FUND OF FUNDS
      1. 1.6.1. Diversification 101
    7. 1.7. INSTITUTIONAL INVESTORS LOVE HEDGE FUNDS
      1. 1.7.1. Alpha Is?
  5. 2. A Hedge Fund Is What?
    1. 2.1. THE CREDIT CRISIS AND HEDGE FUNDS
    2. 2.2. HEDGE FUNDS ARE AN ASSET CLASS
    3. 2.3. LIQUIDITY PRESENTS PROBLEMS
    4. 2.4. TECHNOLOGY HELPS THE INDUSTRY
      1. 2.4.1. Some Strategies Fail to Deliver
    5. 2.5. ACTIVISM IS A NEW BUZZ WORD
    6. 2.6. PRIVATE EQUITY AND HEDGE FUNDS
    7. 2.7. HEDGE FUNDS AROUND THE WORLD
    8. 2.8. ALTERNATIVE INVESTMENTS
  6. 3. How Large Is the Market?
    1. 3.1. HEDGE FUND DATA IS WEAK
      1. 3.1.1. Technology Is Helpful
    2. 3.2. REPORTING IS WEAK
      1. 3.2.1. Leverage
      2. 3.2.2. Risk Management
    3. 3.3. INSTITUTIONALIZATION OF HEDGE FUNDS
  7. 4. Hedge Fund Investing
    1. 4.1. PRICING PROBLEMS
      1. 4.1.1. Accounting Rules
      2. 4.1.2. Illiquid Securities
    2. 4.2. HEDGE FUNDS AND THE PRESS
      1. 4.2.1. The Failure of Large Hedge Funds Will Have a Major Impact on the Markets
      2. 4.2.2. Hedge Funds Are Dangerous Because They Use Derivatives
      3. 4.2.3. The Use of Leverage Is Bad
      4. 4.2.4. Hedge Fund Strategies Are Niche or Quirky
      5. 4.2.5. Hedge Funds Are All-Day Traders Using Nonpublic Information
      6. 4.2.6. Hedge Fund Fees Are Too High
      7. 4.2.7. Hedge Funds Don't Tell Us What They Invest In
      8. 4.2.8. Fund of Funds Charge a Second Level of Fees, Which Reduces Returns
      9. 4.2.9. Hedge Funds Dislike Fund of Funds
    3. 4.3. THE FUND OF FUNDS VALUE PROPOSITION
      1. 4.3.1. Fund of Funds Investors
    4. 4.4. FEES
    5. 4.5. ALLOCATION STRATEGIES
    6. 4.6. BOUTIQUE INVESTING
      1. 4.6.1. Institutional Names
    7. 4.7. IVY AND BoNY
      1. 4.7.1. Madoff
  8. 5. Understanding Alternative Investing Is Both Math and Science
    1. 5.1. HEDGE FUND RETURNS
      1. 5.1.1. Stock Prices
      2. 5.1.2. Yield Curve
      3. 5.1.3. Credit Spreads
      4. 5.1.4. Interest Rates
      5. 5.1.5. Volatility
    2. 5.2. DELIVERING ALPHA
      1. 5.2.1. A Short but Sweet Case Study
    3. 5.3. INVESTING IN A FUND OF FUNDS
      1. 5.3.1. Asset Gathering
    4. 5.4. THIRD-PARTY MARKETERS
    5. 5.5. WHERE THE MONEY COMES FROM
      1. 5.5.1. Raising Capital
    6. 5.6. THE NEW NEW MANAGERS
      1. 5.6.1. Due Diligence?
      2. 5.6.2. Asking Questions
      3. 5.6.3. Getting Answers
      4. 5.6.4. The Due Diligence Process
      5. 5.6.5. Ongoing Monitoring
  9. 6. Why Fund of Funds Work
    1. 6.1. THE EARLY ADOPTERS
      1. 6.1.1. Manager Selection
    2. 6.2. WHO INVESTS
    3. 6.3. GROWING ASSETS
      1. 6.3.1. How Hedge Funds Work
      2. 6.3.2. Pension Plans and Hedge Funds
      3. 6.3.3. Internal Concerns
    4. 6.4. EVERYONE IS INVESTED IN THE SAME THING
      1. 6.4.1. Consultant Issues
    5. 6.5. EDUCATION
      1. 6.5.1. A Pension Investor
      2. 6.5.2. University Endowments
      3. 6.5.3. Drivers of Growth
    6. 6.6. GOING DIRECT
  10. 7. Understanding Risk and the Need for Due Diligence
    1. 7.1. LTCM ISSUES
    2. 7.2. WHAT HAPPENED?
      1. 7.2.1. What Really Is Systemic Risk?
      2. 7.2.2. The SIV
    3. 7.3. LEVERAGE AND LIQUIDITY
      1. 7.3.1. The Credit Crisis
    4. 7.4. UNDERSTANDING DUE DILIGENCE
      1. 7.4.1. Due Diligence Around Risk
      2. 7.4.2. Why Fund of Funds
      3. 7.4.3. Getting Dirty
    5. 7.5. UNDERSTANDING HOW MONEY IS MADE
      1. 7.5.1. Transparency Issues
        1. 7.5.1.1. Clocks
        2. 7.5.1.2. BlackBerrys
        3. 7.5.1.3. Turn Off the Internet
      2. 7.5.2. The Key Components
        1. 7.5.2.1. Transparency
        2. 7.5.2.2. Financial Objective of the Manager
    6. 7.6. MANAGED ACCOUNTS
    7. 7.7. WHAT TO LOOK FOR FIRST
    8. 7.8. FEE CHANGES
      1. 7.8.1. Tactical Asset Allocation
      2. 7.8.2. Where Are All the Managers?
  11. 8. Redemption
    1. 8.1. REDEMPTION REQUESTS
      1. 8.1.1. How to Pick a Manager
    2. 8.2. FUND OF FUNDS DUE DILIGENCE ISSUES
    3. 8.3. LESSONS LEARNED
    4. 8.4. HOT MONEY, COLD RETURNS
    5. 8.5. NEW CHALLENGES
    6. 8.6. LIQUIDITY ISSUES
      1. 8.6.1. Redemption Issues
      2. 8.6.2. High Water Marks
      3. 8.6.3. Suspending Redemptions
  12. 9. Fees
    1. 9.1. INCENTIVE FEE
    2. 9.2. MORE OR LESS
      1. 9.2.1. Are Fees Justified?
      2. 9.2.2. Reasonable Costs
    3. 9.3. MULTI-MANAGER FUNDS
      1. 9.3.1. Getting Returns
      2. 9.3.2. Differentiating
    4. 9.4. RESULTS VERSUS FEES
      1. 9.4.1. Making Smart Decisions
  13. 10. Leverage Facilities and Risk Management
    1. 10.1. LEVERAGE AND PRIME BROKERS
    2. 10.2. RISK MANAGEMENT
      1. 10.2.1. Technology Tools
      2. 10.2.2. Defining Risk Management
      3. 10.2.3. Information Needs
      4. 10.2.4. Credit Crisis Affects Risk Management
      5. 10.2.5. Value at Risk
    3. 10.3. RISK
    4. 10.4. LIQUIDITY ISSUES AT PRIME BROKERS
      1. 10.4.1. How to Evaluate Risk
      2. 10.4.2. Leverage and Its Risk
    5. 10.5. VALUATION RISK
      1. 10.5.1. Portfolio Information
    6. 10.6. THE DEMAND FOR BIG FIRMS
  14. 11. Recent Lessons Learned and Current Trends
    1. 11.1. WHERE THE RISK IS FOUND
      1. 11.1.1. Noncorrelated Investments
      2. 11.1.2. Transparency
    2. 11.2. DELEVERAGE ISSUES
      1. 11.2.1. New Leverage Rules
    3. 11.3. FUND OF FUNDS FIRST
      1. 11.3.1. Portfolio Valuation
      2. 11.3.2. New Rules, New Products
      3. 11.3.3. Thank You Bear and Lehman
    4. 11.4. THE END OF AN ERA
      1. 11.4.1. The Sovereign Wealth Funds
      2. 11.4.2. SWFs Are BIG
  15. 12. New Products
    1. 12.1. 130/30 FUNDS
      1. 12.1.1. Why Mutual Funds Can't Short
    2. 12.2. HEDGE FUND REPLICATION
      1. 12.2.1. The Cost of Replication
    3. 12.3. OPPORTUNITIES IN EMERGING MANAGERS
      1. 12.3.1. Emerging Manager Due Diligence
    4. 12.4. RISKS ASSOCIATED WITH NEW HEDGE FUNDS
      1. 12.4.1. Seed Capital Providers
      2. 12.4.2. Data Helps the Decision Process
      3. 12.4.3. Young Funds Make Sense
  16. 13. Multi-Strategy Funds versus Hedge Fund of Funds
    1. 13.1. DRAWDOWN ISSUES
    2. 13.2. HOW BLOWUPS AFFECT THE INDUSTRY
      1. 13.2.1. Funds of Hedge Funds
      2. 13.2.2. Multi-Strategy Hedge Funds
      3. 13.2.3. Why Multi-Strats
    3. 13.3. CONVERGENCE IN THE HEDGE FUND INDUSTRY
      1. 13.3.1. Credit Crisis in Multi-Strat Funds
      2. 13.3.2. Allocations and Due Diligence
      3. 13.3.3. Review, Review, Review
      4. 13.3.4. Realizing Risk
  17. 14. How Fund of Funds Source Managers
    1. 14.1. WHERE MANAGERS COME FROM
      1. 14.1.1. Talk Is Good
      2. 14.1.2. The Inside Track
    2. 14.2. BLENDING METHODOLOGIES
  18. 15. Conclusion
    1. 15.1. WHAT WE CAN AGREE ON
      1. 15.1.1. Continued Growth
    2. 15.2. DON'T OVERLOOK DUE DILIGENCE
      1. 15.2.1. Due Diligence Helps Avoid Losses
    3. 15.3. HINDSIGHT IS 20/20
      1. 15.3.1. Playing Both Sides
    4. 15.4. STILL, WE BELIEVE
    5. 15.5. THE ANSWER ON FEES
  19. Epilogue: Turning Points
    1. WHAT IS CLIMATE CHANGE?
    2. RECENT PROGRESS
    3. WHERE IS THE OPPORTUNITY?
      1. Role of Hedge Funds
      2. Cutting-Edge Strategies
    4. A CLIMATE OF GREEN STIMULUS
      1. Climate Change Is a Game Changer
    5. DON'T FORGET!
  20. A. Appendix
    1. A.1. STANDARD DUE DILIGENCE: (NAME) FUND
      1. A.1.1. General Information
        1. A.1.1.1. A. Investment Process
          1. A.1.1.1.1. Core Exposure Management:
          2. A.1.1.1.2. The Process of Front–Line Investment Analysis and Risk Management:
          3. A.1.1.1.3. Oversight Function of Risk Management Policies/Protocols:
        2. A.1.1.2. B. Turnover
        3. A.1.1.3. C. Investment Information
        4. A.1.1.4. D. Company and Management Information
        5. A.1.1.5. E. Company Information
        6. A.1.1.6. F. Infrastructure
        7. A.1.1.7. G. Liquidity & Fees
        8. A.1.1.8. H. Compliance
    2. A.2. (NAME): IMPORTANT DISCLAIMERS
  21. Glossary
  22. GLOSSARY SOURCES
  23. Notes
    1. CHAPTER 2
    2. CHAPTER 3
    3. CHAPTER 4
    4. CHAPTER 5
    5. CHAPTER 6
    6. CHAPTER 9
    7. CHAPTER 10
    8. CHAPTER 11
    9. CHAPTER 12
    10. CHAPTER 13
    11. CHAPTER 14
    12. EPILOGUE
    13. GLOSSARY