Posted on 3rd March 2010
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Hedge funds can choose to report their results to database providers who report the overall performance of hedge funds in various categories.
Since performance disclosure is voluntary, peer performance is not a reliable measure. Poor performing managers are not likely to disclose performance (biasing performance upward) and large established managers may not want the trouble (or may want to make their performance stand out rather than be averaged into the peer group.) The aggregate effect is probably that database returns are overstated.
See also:
Hedge Fund BenchmarksAre Hedge Fund Strategies Just About Leverage?Hedge Fund: Kurtosis Definition & Explanation : Hedge FundHedge Fund Strategies: Risk ArbitrageAlternative Routes to Hedge Fund Return Replication
Posted on 22nd February 2010
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Hedge funds are sometimes criticized as lacking transparency. There are a number of reasons for this.
For one thing, they are privately organized entities with minimal regulatory oversight. They are not required to disclose their holdings and strategies, so they do not.
Closely related to the lack of regulation is the fact that they are only marketed to qualified investors – those who presumably have both the sophistication to understand the strategies and the capacity to accept losses. These qualified investors may be able to glean information about the fund, but public investors, who are not able to invest in the fund anyway, are not.
Perhaps the most significant reason, however, is competitive secrecy. Hedge funds are competing both for investment funds and for investment opportunities. They often employ sophisticated techniques that could be compromised if they were widely known.
See also:
Determinants of Funds of Hedge Funds PerformanceAlternative Routes to Hedge Fund Return ReplicationTypes of Hedge FundsTypes of Alternative InvestmentsAre Hedge Fund Strategies Just About Leverage?
Posted on 12th February 2010
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Hedge funds are not subject to investment restrictions and thus have greater breadth of investment instruments at their disposal. These typically include leverage, short sales, derivatives, and concentrated or illiquid positions.
See also:
The Difference Between Mutual Funds and ETFsAre Hedge Fund Strategies Just About Leverage?Hedge Fund: Kurtosis Definition & Explanation : Hedge FundHedge Fund Strategies: Risk ArbitrageOpen-End Mutual Funds
Posted on 3rd February 2010
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The business cycle refers to the swings in gross domestic product from recovery to recession. There are several factors influencing the business cycle.
Consumers tend to be the most important, reflecting 60-70% of GDP in developed countries. Trends in consumer spending can be monitored through retail sales and personal income data.
Business spending on inventories and investment is a smaller but more volatile component of GDP. It can be tracked using surveys such as PMI or ISM.
Monetary policy is used by governments to dampen the overall business cycle. The ability to use monetary policy as a business cycle lever is dampened by inflation, the pace of growth, unemployment levels and capacity utilization.
See also:
Normalizing Price to Earnings Ratio for Business Cycle EffectsGlobal Industry AnalysisIndustry Classification: Business Cycle ReactionSix Stages of Business Cycle InvestingConducting an Industry Analysis
Posted on 18th February 2009
Under: Economic Analysis, FInancial Planning, Industry Analysis, Investment Returns, Portfolio Management | No Comments »
Inflation has different effects on different types of assets. As a result, it is important both to diversify assets in terms of their response to inflation and to form expectations of inflation in order to overweight the assets that will respond best to future conditions.
Cash – inflation causes rising interest rates, and therefore cash tends to earn a higher return when inflation is higher.
Bonds – inflation erodes the fixed payments and terminal values of bonds. Therefore, bonds perform worse when inflation is higher.
Stocks – inflation can increase asset values but erode real cash flows. Rising interest rates can reduce the present value of future cash flows. Stocks tend to do best when inflation is low and predictable, and to fall in either high inflation or deflation.
Real estate – higher cash flows and asset values tend to result in a positive relationship between real estate and inflation.
See also:
What Makes an Asset Class?The Role of Capital Market Expectations in the Portfolio Management ProcessPortfolio Monitoring: Security CharacteristicsMean-Variance Optimizers in Asset AllocationTactical Asset Allocation in Portfolio Management
Posted on 18th January 2009
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The N-firm concentration ratio is an intuitive measure of industry concentration. Industries with high (or low) levels of concentration have few (or many) competitors.
The N-firm concentration ratio is found simply by adding the market shares of the N largest firms in the industry. For example, in an industry with six competitors with respective market shares of 30%, 20%, 20%, 10%, 10% and 10% the three firm concentration ratio would be 30% + 20% + 20% = 70% and the 5-firm concentration ratio would be 90%.
The N-firm concentration ratio is an intuitive measure, but the Herfindahl index provides a greater degree of discrimination. As a result, when the two indicators offer differing signals the Herfindahl index is likely more reliable.
See also:
Herfindahl IndexTobin’s qRatio AnalysisRisk Adjusted Return Measures: The Information RatioPrice Multiples
Posted on 25th December 2008
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The typical business cycle can last as long as 10 years or more. It is typically represented by several stages.
In the recovery stage, there is still a large gap between output and capacity. Bond yields are bottoming and stocks often surge. Taking risk (cyclical and risky stocks, high yield bonds) tends to offer above-average rewards.
In the early upswing, the economy experiences robust growth without causing inflation because output is still below capacity. As the capacity utilization improves, so does profitability. Short rates begin to rise, though long-term rates remain stable.
In the later stages of the upswing, the output gap closes and overheating becomes a danger. Inflation can pick up, resulting in rising interest rates and stock market volatility.
In a slowdown, the slowing economy becomes sensitive to potential shocks. Interest rates are peaking, and interest-sensitive stocks tend to perform well.
In a recession, declining GDP leads to falling short-term interest rates and bond yields. The stock market bottoms out and often starts to rise well ahead of the business cycle recovery.
See also:
Industry Classification: Business Cycle ReactionInventory Cycles in BusinessStages of the Business CycleComponents of Economic Growth TrendsRisk Factors Related to Investments in Distressed Securities
Posted on 18th December 2008
Under: Asset Allocation, Fundamental Analysis, Industry Analysis, Investment Returns, Portfolio Management | No Comments »
Derivative agreements are contracts between two parties, under which at least one of the parties faces a financial obligation to the other. Each counterparty to a contract can be subjected to credit risk, or the possibility that the other party fails to meet its obigation.
In a forward contract, commitments are made at the contract outset but settlement is due at expiration. Consider an agreement under which party A agrees to buy the S&P 500 index from party B for 1,500 in one year. If the S&P 500 is at 1,400, party A owes party B 100, and party B faces potential credit risk (prior to settlement) and actual credit risk (at the time of settlement.) When the S&P 500 is higher than 1,500 it is party A that is subject to credit risk.
Swap contracts are similar to a series of forward contracts, with interim payments occurring along the way. Each payment exposes one party to credit risk. As each payment is made, the total potential credit risk is reduced.
Option contracts have unilateral credit risk – only the seller is obligated to make a payment, so only the buyer is exposed to credit risk once the initial premium has been paid.
See also:
Managing Credit Risk Associated With Derivative ContractsIdentifying Financial Risk ExposuresUsing Derivatives to Hedge Different Types of Credit RiskAlternative Routes to Hedge Fund Return ReplicationUsing Futures to Alter Risk in Fixed Income Portfolios
Posted on 29th November 2008
Under: Derivatives, Futures, Investing in Commodities, Options, Portfolio Management, Risk Management, Swaps | No Comments »