The main source of assets under management for hedge funds are:
- Wealthy private individuals
- Institutional investors
- Financial institutions
- Funds of funds
The main source of assets under management for hedge funds are:
Capture ratio is the average of the captured performance (difference between fund’s returns and benchmark’s returns)
Up capture indicator is fund’s average return divided by benchmark average return, considering only periods when benchmark was up. Bigger is better.
Down capture indicator is fund average/benchmark average considering only periods when benchmark was down. Smaller is better.
Up number ratio is number of periods fund and benchmark were up, divided by number of periods benchmark were up. Bigger is better.
Down number ratio is number of periods fund and benchmark were down, divided by number of periods benchmark was down. Smaller is better.
Up percentage ratio is the percentage of periods the fund outperformed when the benchmark was up. Bigger is better.
Down percentage ratio is the percentage of periods the fund outperformed when benchmark was down. Bigger is better.
Percent gain ratio is number of fund up periods over number of benchmark up periods. Bigger is better.
Ratio of negative months over total months is a good downside risk indicator but ignores absolute size of positive and negative returns.See also:
A fund of funds allocates funds to a variety of hedge fund managers to gain diversification. Multi-strategy funds typically implement a dynamic strategy allocation as market conditions change.See also:
The decline in net asset value from the highest historical point. Often expressed as a percentage loss.
Individual drawdown is any losing period during an investment record.
Maximum drawdown is the largest percentage loss an investor could have realized during a period. It measures the pain an investor may feel if the loss recurs. Comparisons must be made using similar time periods, as maximum drawdown will be greater as measurement frequency interval becomes smaller. It will also be greater for a longer time series, potentially disadvantaging managers with longer track records.
Uninterrupted drawdown calculates the length and severity of an uninterrupted drop.
Recovery time or drawdown duration is the time taken to recover to the prior level.See also:
Relative value arbitrage style hedge funds attempt to capitalize on relative pricing discrepancies between related instruments in anticipation of the prices converging over time
Arbitrage is a two sided strategy involving the simultaneous purchase and sale of related securities that are mispriced compared to each other.
Convertible arbitrage style exploits pricing anomalies between convertible bonds and the underlying equity, typically long the convert and short the equity. It is designed to profit from the fixed income security and the short position in the stock. Typically employ leverage (up to 6:1) and face interest rate, credit, liquidity and corporate event risk.
Fixed income arbitrage strategies exploit pricing anomalies within and across global markets. Typically exploit investor preferences, exogenous shocks to supply or demand, or structural features of fixed income market. Include yield curve arbitrage, sovereign debt arbitrage, corporate versus Treasury spreads, muni vs. Treasury spreads, cash vs. futures and mortgage backed securities arbitrage. Typically neutralize interest rate risk and employ substantial leverage.
The equity market neutral style exploits pricing inefficiencies while exactly neutralizing exposure to market risk.Unlike the equity long/short style, market neutral funds seek to have low correlation to traditional assets. Equity long-short funds typically exhibit some beta.
The index arbitrage style exploits mispricings between the index and index derivatives.
The mortgage-backed securities arbitrage style seeks to profit from the pricing difference between a mortgage instrument with uncertain prepayment and credit quality characteristics, and a non-prepayable Treasury security.See also:
It is calculated as T/6[skewness^2 + (kurtosis^2/4)]
If the Bera-Jarque statistic is less than 5.99, the returns are considered normally distributed.
Event-driven style hedge funds typically focus on distressed securities or risk arbitrage.
The distressed securities style focuses on debt and equity of companies experiencing or expecting to experience financial difficulty. It includes reorganization, bankruptcy and distressed sales. Securities often trade at deep discounts due to regulatory restrictions on some investors, lack of research, low liquidity and excessive investor fear. Investors accept credit and liquidity risk in hope of long-term turnaround. Sometimes managers hedge with options, sometimes take active roles in restructuring the company.
The merger arbitrage style shorts the acquirer and goes long the acquiree to capture the spread.
Event-driven multi-strategy funds draw on multiple themes including merger/risk arbitrage, distressed securities and other themes such as Reg D private transactionsSee also:
Kurtosis is the fourth central movement of a distribution. The first three movements are mean, standard deviation, and skewness. It measures the distribution’s peakedness and the thickness of its tails.
Leptokurtosis, or positive excess kurtosis, indicates a distribution that is more peaked at the center and has fatter than normal tails.
Platykurtosis, or negative excess kurtosis, indicates a relatively flatter top and thinner tails.See also:
Hedge funds using the equity long/short style invest in equities, combining long and short investments to reduce but not eliminate market exposure. Major sub-categories of the style include:
The short selling style acts inversely to market direction.
The emerging markets style invests in all types of securities (equity, fixed, sovereign) in emerging markets. It tends to be more volatile and funds are often long-only due to local market restrictions on short selling.
The market timer style varies long and short exposure in reaction to market conditions.See also:
Skewness is the third central movement of a distribution. The first two movements are the mean and the standard deviation. It measures the symmetry of a return distribution around its mean.
Zero skewness indicates a symmetrical distribution. Investors generally prefer higher skewness and avoid negative skewness if possible.See also: