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Hedge Fund of Funds Investing: An Investor's Guide

Book Description

Hedge funds have rightly gained the attention of private and institutional investors in recent years, proving themselves as useful portfolio diversifiers and preservers of wealth while greatly dispelling their reputation as an "unsafe" investment. Yet investors attempting to navigate in the field of hedge funds face significant challenges: the large number of funds, the diversity of strategies used, the range of financial instruments traded, and the various formats for investing.

Pooling multiple hedge funds together into one vehicle, the fund of funds provides a ready solution, combining professional management expertise with asset allocation. In this book--the first of its kind--industry expert Joseph Nicholas shows investors how these funds operate, the benefits and risks, and the criteria and due diligence to utilize when selecting funds. Nicholas provides an in-depth analysis of historical fund performance and offers unique insight into the industry and trends that may affect its evolution.

Clear, insightful, and illustrated with numerous charts and graphs, Hedge Fund of Funds Investing is an essential resource for serious investors.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Contents
  6. Acknowledgments
  7. Introduction
    1. THE FUND OF FUNDS ADVANTAGE
    2. THE STRUCTURE OF THIS BOOK
  8. PART 1: The Fund of Funds Industry
    1. 1: Fund of Funds in the Hedge Fund Industry
      1. HEDGE FUND INVESTMENT OPTIONS
      2. GROWTH OF FUNDS OF FUNDS
      3. HEDGE FUND INDUSTRY CHARACTERISTICS AND TRENDS
      4. HEDGE FUND INVESTMENT STRUCTURE
      5. SUMMARY
    2. 2: Hedge Fund Investment Strategies
      1. CONVERTIBLE ARBITRAGE
      2. DISTRESSED SECURITIES
      3. EMERGING MARKETS
      4. EQUITY HEDGE
      5. EQUITY MARKET NEUTRAL
      6. EVENT DRIVEN
      7. FIXED INCOME
      8. MACRO
      9. MARKET TIMING
      10. MERGER ARBITRAGE
      11. RELATIVE VALUE ARBITRAGE
      12. SECTOR LONG/SHORT
      13. SHORT SELLING/SHORT BIAS
      14. SUMMARY
    3. 3: Fund of Funds Mechanics and the Two-Tiered Structure
      1. STRUCTURAL CONSIDERATIONS
      2. SUMMARY
    4. 4: Advantages and Disadvantages of Funds of Funds
      1. ADVANTAGES
      2. DISADVANTAGES
      3. SUMMARY
  9. PART 2: Historical Performance of Funds of Funds
    1. 5: Performance of Funds of Funds
      1. FUND OF FUNDS SUBSTRATEGIES
      2. FUND OF FUNDS RETURNS 1990–2002
      3. FUND OF FUNDS VOLATILITY 1990–2002
      4. FUND OF FUNDS RETURN VERSUS VOLATILITY 1990–2002
      5. FUND OF FUNDS RISK-ADJUSTED RETURNS—THE SHARPE RATIO
      6. PRESERVATION OF CAPITAL 1990–2002
      7. AVERAGE PERFORMANCE DURING NEGATIVE PERIODS AND POSITIVE PERIODS 1990–2002
      8. SUMMARY
    2. 6: Fund of Funds in a Portfolio With Traditional Assets
      1. LINEAR ANALYSIS OF RETURNS
      2. ADDING FUNDS OF FUNDS TO A TRADITIONAL PORTFOLIO
      3. ACHIEVING SUPERIOR RISK-ADJUSTED RETURNS
      4. SUMMARY
  10. PART 3: A Commonsense Approach to Selecting Funds of Funds
    1. 7: Defining Objectives and Identifying Candidates
      1. STEP 1: DEFINE OBJECTIVES AND PARAMETERS
      2. STEP 2: SCREEN TO CREATE A FUNDS OF FUNDS SHORT LIST
      3. SUMMARY
    2. 8: Issues in Due Diligence: The Fund of Funds Firm
      1. BACKGROUND INFORMATION
      2. PRODUCT INFORMATION
      3. PERFORMANCE
      4. SUMMARY
    3. 9: Issues in Due Diligence: Portfolio Management
      1. ASSET ALLOCATION/STYLE SELECTION
      2. DUE DILIGENCE CRITERIA IN MANAGER SELECTION
      3. PORTFOLIO CONSTRUCTION
      4. SUMMARY
    4. 10: Issues in Due Diligence: Risk Management
      1. TRANSPARENCY AND SEPARATELY MANAGED ACCOUNTS
      2. RISK MANAGEMENT
      3. COMPLIANCE AND LEGAL ISSUES
      4. SUMMARY
    5. 11: Fund of Funds Selection Case Study
      1. SCENARIO
      2. FINAL SELECTIONS
      3. SUMMARY
  11. Appendix A: AIMA Due Diligence Questionnaire
    1. AIMA's ILLUSTRATIVE QUESTIONNAIRE FOR DUE DILIGENCE OF
  12. Appendix B: Excerpts from HFR Fund of Funds Industry Report
  13. Index
  14. About Bloomberg
  15. About the Author