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Reconsidering Funds of Hedge Funds

Book 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.

  • Covers recent advances in risk management, due diligence, tail risk, and allocation
  • Presents an in-depth analysis of UCITs
  • Balances academic and professional viewpoints
  • Table of Contents

    1. Cover image
    2. Title page
    3. Table of Contents
    4. Copyright
    5. Foreword
    6. Editor
    7. Contributors
    8. Acknowledgments
    9. Introduction
      1. Section 1 Due Diligence and Risk Management
      2. Section 2 UCITS Performance
      3. Section 3 Performance
      4. Section 4 Fund of Hedge Fund Alpha
      5. Section 5 Tail Risk
      6. Section 6 Regulation
    10. Chapter 1. After the Crisis: The Withering of the Funds of Hedge Funds Business?
      1. 1.1 Introduction
      2. 1.2 Institutional versus Private Investor FoHFs
      3. 1.3 The Bubble Bursts
      4. 1.4 The Aftermath of Crisis
      5. 1.5 The Excess Cash Problem
      6. 1.6 Could FoHFs Problems Have Been Prevented?
      7. 1.7 The Role of Performance Decay
      8. 1.8 Outlook
      9. Conclusion
      10. References
    11. Section 1: Due Diligence and Risk Management
      1. Chapter 2. Evaluating Trends in Funds of Hedge Funds Operational Due Diligence
        1. 2.1 Introduction
        2. 2.2 Increased Focus on Operational Due Diligence
        3. 2.3 Chapter Goals
        4. 2.4 What is Operational Risk?
        5. 2.5 The Different Types of Operational Risk
        6. 2.6 Operational Risk in a FoHFs Context
        7. 2.7 FoHFs Operational Due Diligence Frameworks
        8. 2.8 The Madoff Effect
        9. 2.9 Deep-Dive Operational Due Diligence
        10. 2.10 Broadening Scope Reviews and Declining Checklist Approaches
        11. 2.11 The Increasing Role of Operational Due Diligence Consultants
        12. Conclusion
        13. References
      2. Chapter 3. The Limits of UCITS for Funds of Hedge Funds
        1. 3.1 Introduction
        2. 3.2 The UCITS Industry
        3. 3.3 Challenges for a UCITS FoHFs Manager
        4. 3.4 Performances
        5. Conclusion
        6. Acknowledgments
        7. References
        8. Recommended Reading
      3. Chapter 4. Due Diligence: Lessons from the Global Financial Crisis for Funds of Hedge Funds with Particular Emphasis on the Asia–Pacific Region
        1. 4.1 Introduction
        2. 4.2 Due Diligence when Investing in a Hedge Fund
        3. 4.3 Investment in a FoHF and Due Diligence
        4. 4.4 Asia–Pacific Hedge Fund and FoHFs Growth and Performance
        5. 4.5 Before the GFC
        6. 4.6 Collapse: 2008
        7. 4.7 After the Storm
        8. 4.8 The Requirements of Due Diligence in a Post-GFC Environment
        9. Conclusion
        10. Acknowledgments
        11. References
      4. Chapter 5. The Use of Managed Accounts by Funds of Hedge Funds
        1. 5.1 Adversities of Funds of Hedge Funds in 2008
        2. 5.2 MAC Structures for FoHFs
        3. 5.3 Hypotheses, Advantages, and Disadvantages of MACs
        4. 5.4 Survey
        5. 5.5 Summary
        6. Conclusion
        7. Acknowledgments
        8. References
      5. Chapter 6. Choice of Risk Measure in Evaluating UCITS Funds of Hedge Funds
        1. 6.1 Introduction
        2. 6.2 Literature Review
        3. 6.3 Empirical Analysis
        4. Conclusion
        5. Acknowledgments
        6. References
    12. Section 2: UCITS Performance
      1. Chapter 7. UCITS Funds of Hedge Funds – The New Panacea?
        1. 7.1 Introduction
        2. 7.2 Fund Structures
        3. 7.3 Investment Managers
        4. 7.4 Funds Liquidity and Fees
        5. 7.5 Return and Risk Analysis
        6. Conclusion
        7. Acknowledgments
        8. References
      2. Chapter 8. The Return Potential of UCITS Funds of Hedge Funds: An Analysis of their Investment Universe
        1. 8.1 Introduction
        2. 8.2 Descriptive Comparison of the UCITS versus the Offshore Hedge Fund Universe
        3. 8.3 Performance Comparison of Simulated UCITS FoHFs versus Offshore FoHFs Portfolios
        4. Conclusion
        5. References
      3. Chapter 9. How Geography, Flows, and Size Affect the Risk-Adjusted Performance of UCITS III Funds of Hedge Funds
        1. 9.1 Introduction
        2. 9.2 Literature Review
        3. 9.3 Data
        4. 9.4 Performance of and Flows into UCITS FoHFs
        5. 9.5 Risk Analysis
        6. Conclusion
        7. Acknowledgments
        8. References
      4. Chapter 10. Funds of Hedge Funds versus Do-It-Yourself Funds of UCITS
        1. 10.1 Introduction
        2. 10.2 Issues with Hedge Fund Investing – The Case of FoHFs
        3. 10.3 Testing for Non-Linearities in Hedge Fund Returns – A New Approach
        4. 10.4 UCITS-Compliant Hedge Funds as a Fit for FoHFs Construction
        5. 10.5 Regulatory Risks Around UCITS Hedge Funds
        6. Conclusion
        7. Acknowledgments
        8. References
    13. Section 3: Performance
      1. Chapter 11. Predicting Funds of Hedge Funds Attrition Through Performance Diagnostics
        1. 11.1 Introduction
        2. 11.2 Data and Variable Construction
        3. 11.3 The Treatment of Performance Measures
        4. 11.4 Linking Fund Performance to Subsequent Attrition
        5. Conclusion
        6. References
        7. Appendix
      2. Chapter 12. Does Funds of Hedge Funds Size Matter? Size versus Performance Before, During, and After the Crisis
        1. 12.1 Backdrop
        2. 12.2 FoHFs Post the 2008 Financial Crisis
        3. 12.3 Performance
        4. Conclusion
        5. Acknowledgments
        6. References
      3. Chapter 13. Normalized Risk-Adjusted Performance Measures Revisited: The Performance of Funds of Hedge Funds Before and After the Crisis
        1. 13.1 Introduction
        2. 13.2 Theoretical Framework
        3. 13.3 Data and Empirical Method
        4. Conclusion
        5. References
      4. Chapter 14. The Impact of the 2008 Financial Crisis on Funds of Hedge Funds
        1. 14.1 Introduction
        2. 14.2 Data and Sample Statistics
        3. 14.3 Changes in AUM During the 2008 Financial Crisis
        4. 14.4 Asset Size and FOHFS Performance During the 2008 Financial Crisis
        5. 14.5 Diversification and FOHFS Performance During the 2008 Financial Crisis
        6. 14.6 Risk Factor Estimates of FoHFs Pre- and Post-2008 Financial Crisis
        7. 14.7 Attrition Rates and FoHFs Survival Analysis
        8. Conclusion
        9. References
      5. Chapter 15. Forecasting Funds of Hedge Funds Performance: A Markov Regime-Switching Approach
        1. 15.1 Introduction
        2. 15.2 Data
        3. 15.3 Forecasting Models
        4. 15.4 Results
        5. Conclusion
        6. Appendix
        7. References
      6. Chapter 16. A Panel-Based Quantile Regression Analysis of Funds of Hedge Funds
        1. 16.1 Introduction
        2. 16.2 Panel Data Analysis and Quantile Regression
        3. 16.3 Data and Methodology
        4. 16.4 Discussion of the Results
        5. Conclusion
        6. Acknowledgments
        7. References
    14. Section 4: Fund of Hedge Fund Alpha
      1. Chapter 17. Reward-to-Risk Ratios of Funds of Hedge Funds
        1. 17.1 Introduction
        2. 17.2 Methodology
        3. 17.3 Data and Descriptive Statistics
        4. 17.4 Empirical Results
        5. Conclusion
        6. References
      2. Chapter 18. The Short-Run Performance Persistence in Funds of Hedge Funds
        1. 18.1 Introduction
        2. 18.2 Data
        3. 18.3 Time Variation in FoHFs Risk Exposure
        4. 18.4 Time Variation in Performance
        5. 18.5 Back-Test on Short-Run Performance Persistence
        6. Conclusion
        7. Acknowledgments
        8. References
      3. Chapter 19. ‘Seeking Alpha’: The Performance of Funds of Hedge Funds
        1. 19.1 Introduction
        2. 19.2 Theoretical Approaches to Model Hedge Fund Returns
        3. 19.3 Regression Analysis
        4. 19.4 Results
        5. Conclusion
        6. Annex
        7. References
      4. Chapter 20. Quantitative Insight into Management of Funds of Hedge Funds and Consequences on Fund Alpha Performance
        1. 20.1 Introduction
        2. 20.2 Principal Components Analysis
        3. 20.3 Data and the Nature of the First Two Principal Components
        4. 20.4 Classification and Alpha Performance Evaluation in the Recent Financial Crisis
        5. 20.5 The ‘Pro-Active’ Nature of FoHFs
        6. 20.6 The Story of the Financial Crisis of 2008–2009 and Subsequent Developments
        7. Conclusion
        8. Acknowledgments
        9. References
      5. Chapter 21. Selecting Top Funds of Hedge Funds Based on Alpha and Other Performance Measures
        1. 21.1 Introduction and Literature Review
        2. 21.2 Impact of the Subprime Crisis
        3. 21.3 Performance Metrics
        4. 21.4 Summary Statistics of FoHFs Before and After the Subprime Crisis
        5. 21.5 How Does One Select ‘Elite’ FoHFs?
        6. 21.6 Identified FoHFs Managers with Genuine Skill
        7. 21.7 Out-of-Sample Performance of In-Sample ‘Elite’ FoHFs Funds
        8. Conclusion
        9. Acknowledgments
        10. References
      6. Chapter 22. Funds of Hedge Funds Strategies and Implications for Asset Management: Is Diversification Enough?
        1. 22.1 Introduction and Literature Review
        2. 22.2 Data
        3. 22.3 Factor Model (Risk Factors)
        4. 22.4 Portfolio Allocation with Hedge Funds and FoHFs
        5. 22.5 Certainty Equivalence and Portfolio Allocation with FoHFs
        6. Conclusion
        7. References
    15. Section 5: Tail Risk
      1. Chapter 23. The Intertemporal Relation between Tail Risk and Funds of Hedge Funds Returns
        1. 23.1 Introduction
        2. 23.2 Data and Methodology
        3. 23.3 Empirical Results
        4. Conclusion
        5. References
      2. Chapter 24. Tail Risk Protection for Funds of Hedge Funds
        1. 24.1 Introduction
        2. 24.2 VIX, VIX Futures, VIX Options, and the VVIX
        3. 24.3 Tail Risk Hedging
        4. 24.4 Tail Risk Protection for FoHFs
        5. Conclusion
        6. References
      3. Chapter 25. Autocorrelation, Bias, and Fat Tails: An Analysis of Funds of Hedge Funds
        1. 25.1 Introduction
        2. 25.2 Data and Strategies
        3. 25.3 Classical Performance Measurement
        4. 25.4 Problems of Classic Performance Measurement
        5. 25.5 Integrating the Problems in Performance Measurement
        6. 25.6 Adjusted Hedge Fund Performance Measurement
        7. 25.7 Analysis of Subperiods (Pre-Crisis and Post-Crisis)
        8. Conclusion
        9. References
      4. Chapter 26. Crises and Funds of Hedge Funds Tail Risk
        1. 26.1 Introduction
        2. 26.2 Methodology
        3. 26.3 Empirical Results
        4. Conclusion
        5. References
      5. Chapter 27. Funds of Hedge Funds, Efficient Portfolios, and Investor Clienteles: Empirical Evidence from Growth and Financial Crisis Periods
        1. 27.1 Introduction
        2. 27.2 Literature Review
        3. 27.3 Data
        4. 27.4 Methodology
        5. 27.5 Empirical Results
        6. Conclusion
        7. References
    16. Section 6: Regulation
      1. Chapter 28. Regulation: Threat or Opportunity for the Funds of Hedge Funds Industry?
        1. 28.1 Introduction
        2. 28.2 FoHFs and Solvency II
        3. 28.3 Fine-Tuning Solvency II Standard Formula
        4. 28.4 An Application to FoHFs
        5. Conclusion
        6. References
      2. Chapter 29. Funds of Hedge Funds and the Principles of Fiduciary Investing Following the Global Financial Crisis
        1. 29.1 Introduction
        2. 29.2 The Principles of Fiduciary Investing
        3. 29.3 Prudent Investing
        4. 29.4 Investing in FoHFs
        5. Conclusion
        6. Acknowledgments
        7. References
      3. Chapter 30. Understanding the Regulation Impact: US Funds of Hedge Funds After the Crisis
        1. 30.1 Introduction
        2. 30.2 The Regulatory and Intervention Debate: Looking to the Economists
        3. 30.3 Lessons From Other Industries
        4. 30.4 The Road to Dodd–Frank
        5. 30.5 Dodd–Frank
        6. 30.6 US Funds and the AIFM Directive
        7. 30.7 FoHFs Trends During and After the GFC
        8. Conclusion
        9. Acknowledgments
        10. References
      4. Chapter 31. Canada and Australia: Do They Provide a Regulatory Model for Funds of Hedge Funds?
        1. 31.1 Introduction
        2. 31.2 FoHFs Statistical Comparisons Between Australia and Canada
        3. 31.3 FoHFs Regulation
        4. Conclusion
        5. Acknowledgments
        6. References
      5. Chapter 32. South African Regulatory Reforms of Funds of Hedge Funds
        1. 32.1 Introduction
        2. 32.2 The Investment Climate in South Africa
        3. 32.3 FoHFs in South Africa
        4. 32.4 Key Considerations for Investors in South African FoHFs
        5. 32.5 Regulation Impacting on South African FoHFs
        6. Conclusion
        7. Acknowledgments
        8. References
    17. Index