Archive for the 'Uncategorized' Category

Who invests in hedge funds?

The main source of assets under management for hedge funds are:

  • Wealthy private individuals
  • Institutional investors
  • Financial institutions
  • Funds of funds

Posted on 3rd November 2010
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Benchmark related statistics used to evaluate hedge funds

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.

Posted on 12th October 2010
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What is the Difference Between a Fund of Funds and a Multi-Strategy Fund?

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.

Posted on 3rd October 2010
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What is Drawdown

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.

Posted on 12th September 2010
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What is the Bera-Jarque statistic?

The Bera-Jarque statistic combines skewness and kurtosis into a single measurement, and determines whether kurtosis is unusually different from its expected value.

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.

Posted on 12th August 2010
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The Event Driven Style

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 transactions

Posted on 3rd August 2010
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What is kurtosis?

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.

Posted on 12th July 2010
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The Equity Long-Short Style

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:

  • Global
  • Regional or industry focus
  • Dedicated short bias
  • Emerging market
  • Market timing

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.

Posted on 3rd July 2010
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What is Skewness

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.

Posted on 12th June 2010
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Tactical Investment Style Funds

The predominant strategies within the tactical investment style are Global macro and commodity trading advisors (CTA).

The global macro strategy makes leveraged, directional, opportunistic investments in global currency, equity, bond and commodity markets on a discretionary basis. Managers usually rely on a top-down approach and base trading views on fundamental economic, political and market factors. They seek high returns with less concern over risk. Success is heavily dependent upon manager skill.

Discretionary traders base decisions on fundamental and technical analysis, and their experience. Systematic traders believe future price movements can be anticipated by quantitative analysis of historical price movements.

Posted on 3rd June 2010
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