Hedge funds : insights in performance measurement, risk analysis, and portfolio allocation

656 Pages·2005·5.56 MB·English

by  Greg N Gregoriou

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Hedge Funds
Insights in Performance
Measurement, Risk Analysis,
and Portfolio Allocation
GREG N. GREGORIOU
GEORGES HÜBNER
NICOLAS PAPAGEORGIOU
FABRICE ROUAH
John Wiley & Sons, Inc.
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Copyright © 2005 by Greg N. Gregoriou, Georges Hübner, Nicolas Papageorgiou, and
Fabrice Rouah. All rights reserved. Chapter 1, “Integrating Hedge Funds into the Traditional
Portfolio” by Harry Kat originally appeared in theJournal of Wealth Management(2003).
This article is reprinted with permission from Institutional Investor, Inc. Chapter 6, “Revisit-
ing the Role of Hedge Funds in Diversified Portfolios” by Jean Brunel originally appeared
in the Journal of Wealth Management, Volume 7, Number 3 (2003), pp. 35–48. This article
is reprinted with permission from Institutional Investor, Inc. Chapter 15, “Performance in
the Hedge Funds Industry: An Analysis of Short- and Long-Term Persistence” by P.-A. Barès,
R. Gibson, and S. Gyger originally appeared in the Journal of Alternative Investments,
Volume 6, Number 3 (Winter 2003). This article is reprinted with permission from Institu-
tional Investor, Inc.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
ISBN-13 978-0-471-73743-8
ISBN-10 0-471-73743-7
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Contents
Preface xi
Acknowledgments xiii
PART ONE
Portfolio Allocation in Hedge Funds 1
CHAPTER1
Integrating Hedge Funds into the Traditional Portfolio 3
Harry M. Kat
CHAPTER2
Hedge Funds from the Institutional Investor’s Perspective 17
Noël Amenc, Felix Goltz, and Lionel Martellini
CHAPTER3
Funds of Hedge Funds versus Portfolios of Hedge Funds:
A Comparative Analysis 51
Daniel Capocci and Valérie Nevolo
CHAPTER 4
Analyzing Style Drift in Hedge Funds 83
Nolke Posthuma and Pieter Jelle Van der Sluis
CHAPTER 5
Hedge Fund Allocation under Higher Moments and Illiquidity 105
Niclas Hagelin, Bengt Pramborg, and Fredrik Stenberg
CHAPTER 6
Revisiting the Role of Hedge Funds in Diversified Portfolios 129
Jean Brunel
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viii CONTENTS
CHAPTER 7
Hedge Fund Selection: A Synthetic Desirability Index 151
Jean-Pierre Langevin
PART TWO
Hedge Fund Management 163
CHAPTER8
Hedge Fund Index Tracking 165
Carol Alexander and Anca Dimitriu
CHAPTER 9
Designing a Long-Term Wealth Maximization Strategy
for Hedge Fund Managers 181
Keith H. Black
CHAPTER10
Profiles of Hedge Fund Indexes against
Conventional Asset Style Indexes 197
Barry Feldman
CHAPTER11
Applying Securitization Technology to Hedge Funds 235
Paul U. Ali
CHAPTER12
Maximum Drawdown Distributions with Volatility Persistence 245
Kathyrn Wilkens, Carlos J. Morales, and Luis Roman
PART THREE
Risk and Performance Measurement 257
CHAPTER13
A Literature Review of Hedge Fund Performance Studies 259
Fabrice Rouah
CHAPTER14
Investing in Hedge Funds through Multimanager Vehicles 273
Meredith A. Jones
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Contents ix
CHAPTER15
Performance in the Hedge Fund Industry:
An Analysis of Short- and Long-term Persistence 297
Sébastien Gyger, P.-A. Bares, and R. Gibson
CHAPTER16
Further Evidence on Hedge Fund Performance:
A Calendar-Time Approach 323
Maher Kooli
CHAPTER17
Investing in Hedge Funds:
Risks, Returns, and Performance Measurement 341
Francis C. C. Koh, Winston T. H. Koh, David K. C. Lee,
Kok Fai Phoon
CHAPTER18
Efficiency of Funds of Hedge Funds:
A Data Envelopment Analysis Approach 365
Greg N. Gregoriou and Kevin McCarthy
CHAPTER19
The Performance of Hedge Funds in the Presence
of Errors in Variables 381
Alain Coën, Aurélie Desfleurs, Georges Hübner, and
François-Éric Racicot
CHAPTER20
Alternative RAPMs for Alternative Investments 403
Milind Sharma
PART FOUR
Statistical Properties of Hedge Funds 435
CHAPTER21
Volatility Regimes and Hedge Fund Management 437
Mark Anson, Ho Ho, and Kurt W. Silberstein
CHAPTER22
Does Extreme Risk Affect the Fund of Hedge Funds Composition? 453
Laurent Favre
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x CONTENTS
CHAPTER23
A Hedge Fund Investor’s Guide to Understanding Managed Futures 473
Hilary F. Till and Joseph Eagleeye
CHAPTER24
Fat-Tail Risk in Portfolios of Hedge Funds and Traditional Investments 491
Jean-François Bacmann and Gregor Gawron
CHAPTER25
Skewing Your Diversification 515
Mark S. Shore
CHAPTER26
Investable Equity Long/Short Hedge Funds: Properties and Behavior 527
Edward Leung and Jacqueline Meziani
CHAPTER27
Hedge Funds and Portfolio Optimization: A Game of Its Own? 547
Zsolt Berenyi
PART FIVE
Special Classes of Hedge Funds 567
CHAPTER28
Structured Products on Fund of Fund Underlyings 569
Jens Johansen
CHAPTER29
Hedge Funds and the Stale Pricing Issue 607
Mohamed Gaber, Greg N. Gregoriou, and William Kelting
References 615
Index 637
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Preface
T
he idea for this book came about when we realized that our book on
Commodity Trading Advisors (CTAs) was so well received. We decided
that a hedge fund reader with new chapters dealing with quantitative and
qualitative analyses would be a helpful and welcome addition and comple-
mentary to the CTA reader. The chapters are intended to introduce readers
to some of the issues encountered by academics and practitioners working
with hedge funds. They deal with new methods of hedge fund performance
evaluation, portfolio allocation, and risk and returns that are imperative in
understanding correct selection and monitoring of hedge funds. Although
numerous chapters are technical in nature, with econometric and statistical
models, by well-known academics and professionals in the field, stress has
been put on understanding the applicability of the results as well as the theo-
retical development. We believe this book can assist institutional investors,
pension fund managers, endowment funds, and high-net-worth individuals
wanting to add hedge funds to traditional stock and bond portfolios.
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Acknowledgments
T
he editors wish to thank Bill Fallon, senior finance editor, for his enthu-
siastic support and constructive comments. We also extend sincere and
warmest thanks to Alexia Meyers, senior production editor at Wiley, for her
wonderful assistance in editing and meticulously reviewing the manuscript.
We thank Karen Ludke, editorial program assistant at Wiley, for her out-
standing assistance during this process, and Debra Manette, copyeditor, for
being very attentive to details in the manuscript.
We also thank Allison Adams, publisher of Institutional Investor Jour-
nals, for allowing us to reprint Chapters 1 and 6 from the Journal of Wealth
Management and Chapter 15 from the Journal of Alternative Investments.
We also express thanks to Richard E. Oberuc at LaPorte Asset Allocation
System (www.laportesoft.com) for the use of his software in preparing
Chapter 18 and to Josh Rosenberg at Hedge Fund Research (www.hfr.com).
The authors further thank Professor Thomas Schneeweis at the
Isenberg School of Management/University of Massachusetts and Director/
Editor of the Centre for International Securities and Derivatives Markets
(CISDM)/Journal of Alternative Investments(JAI) for allowing the authors
of Chapter 18 to reproduce the names the fund of hedge funds in the
CISDM database. We kindly thank Raj Gupta, Research Director/Assistant
Editor of CISDM/JAI, and Dr. Ellen Yan, Executive Director at CISDM,
for her assistance and help with questions regarding the data. We also
thank Kevin Hale, an economics and finance student, at State University of
New York, College at Plattsburgh for formatting the references.
Nicolas Papageorgiou would like to thank the research office at HEC
Montreal.
Finally we thank Tate Haymond at PerTrac (www.pertrac2000.com)
for the use of his software in preparing Chapter 18.
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About the Editors
Greg N. Gregoriou is Associate Professor of Finance and coordinator of
faculty research in the School of Business and Economics at State Univer-
sity of New York, College at Plattsburgh. He obtained his PhD (finance)
from the University of Quebec at Montreal and is the hedge fund editor for
the peer-reviewed journal Derivatives Use, Trading and Regulation pub-
lished by Henry Stewart publications based in the United Kingdom. He has
authored over 40 articles on hedge funds and managed futures in various
U.S. and U.K. peer-reviewed publications, including the Journal of Futures
Markets, European Journal of Operational Research, and Annals of Oper-
ations Research. This is his third book with John Wiley & Sons.
Nicolas Papageorgioucompleted his PhD at the ISMA Centre, University of
Reading, United Kingdom in 2002 and has since held the position of Assis-
tant Professor in the Department of Finance at HEC Montreal. His doctoral
research focused on the modelling of corporate credit risk, and the empirical
evaluation of models for pricing corporate liabilities and credit derivatives.
Nicolas Papageorgiou is also interested in alternative fund management,
specifically hedge funds and CTAs, and has written several papers and book
chapters on performance measurements of these funds. Dr. Papageorgiou’s
research has been published in leading journals such as Journal of Futures
Markets, Journal of Financial Research, and Journal of Fixed Income. He
has also been invited to present his research at several conferences in North
America and Europe.
Georges Hübner holds a PhD in Management from INSEAD. He is the
Deloitte Professor of Financial Management at the University of Liège and
also teaches finance at Maastricht University and EDHEC (Lille). He has
taught at the executive and postgraduate levels in several countries in
Europe, North America, Africa, and Asia. He has written two books on
financial management and has authored several peer-reviewed research arti-
cles in the fields of hedge funds and derivatives, including the Journal of
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xvi ABOUT THE EDITORS
Empirical Finance, the Journal of Futures Markets, and the Journal of
Banking and Finance. He was the recipient of the prestigious 2002 Iddo
Sarnat Award for the best paper published in JBF in 2001.
Fabrice Rouahis an Institut de Finance Mathématique de Montréal (IFM2)
Scholar and a PhD candidate in Finance, McGill University, Montreal,
Quebec. Mr. Rouah is a former Faculty Lecturer and Consulting Statistician
in the Department of Mathematics and Statistics at McGill University.
He specializes on the statistical and stochastic modeling of hedge funds,
managed futures, and CTAs, and is a regular contributor in peer-reviewed
academic publications on alternative investments. He obtained his BSc in
applied mathematics from Concordia University and his MSc in applied
statistics from McGill University. This is his second book with John Wiley
& Sons.