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.

See also:
  • Determinants of Funds of Hedge Funds Performance
  • Tactical Asset Allocation in Portfolio Management
  • What is the Difference Between a Hedge Fund and a Mutual Fund?
  • What is the Difference Between a Fund of Funds and a Multi-Strategy Fund?
  • Equity Investment Styles
  • Posted on 3rd June 2010
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    Average Gain, Average Loss, and the Gain to Loss Ratio

    When measuring hedge fund performance, one simple tool is to look at average gains and losses for periods.

    The average gain considers only periods in which there was a gain, and is the simple average return in those periods. Likewise, the average loss is the simple average return in all periods in which there was a loss.

    The gain to loss ratio is the average gain divided by the average loss.

    What the gain to loss ratio does not tell you is how many periods realized gains and how many realized losses. It also fails to account for compounding of returns.

    See also:
  • Translation Gains and Losses
  • Extinguishing Debt
  • Accounting for Debt Retirement
  • The Behavioral Finance Investment Framework
  • Benchmark related statistics used to evaluate hedge funds
  • Posted on 12th May 2010
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    Why do Hedge Funds have Redemption Limitations?

    Investors are required to hold for a specified time and provide a specified advance notice before redeeming. These restrictions permit the manager to take a longer-term point of view and invest in less liquid securities.

    See also:
  • Determinants of Funds of Hedge Funds Performance
  • Debt Covenants
  • Risk Transparency versus Position Transparency
  • Are Hedge Fund Strategies Just About Leverage?
  • Do Market Timing Hedge Funds Time the Market?
  • Posted on 3rd May 2010
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    Hedge Fund Fee Equalization

    Hedge fund fees typically include a fee based on the amount of assets being managed and a fee based on the fund’s performance. The performance based fee is typically 20% of the performance in excess of some minimum target. So, for example, a firm with $100 million in beginning assets is expected to earn at least 2% per quarter, and in a given quarter their return is 3% ($3 million.) Their performance based fee would be 20% of the difference between the $3 million actually earned and the $2 million (2%) minimum requirement – or $200,000.

    If, in the following quarter, the fund loses money and returns to $100 million in assets, obviously they would not earn a fee in that period. However, investors would also be reluctant to pay a fee for the fund simply recovering the $3 million lost. After all, they already paid a performance fee when the fund reached $103 million the first time.

    As a result, fund structures typically include a “high water mark” provision. This provision stipulates that the fund cannot charge additional performance fees until the previous high value has been surpassed.

    In order to keep investors from seeking a “free ride” by investing in funds that have recently suffered a loss in order to avoid performance fees until the high water mark is recovered, most funds employ accounting methods known as fee equalization to ensure that all investors in the fund are charged incentive fees on an equitable basis.

    See also:
  • Are Hedge Fund Strategies Just About Leverage?
  • Hedge Fund: Kurtosis Definition & Explanation : Hedge Fund
  • Hedge Fund Strategies: Risk Arbitrage
  • Risk Transparency versus Position Transparency
  • Alternative Routes to Hedge Fund Return Replication
  • Posted on 12th April 2010
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    The Nature of Hedge Fund Fee Schedules

    Most hedge funds charge 1-2% as a management fee plus 20% of net profits above a hurdle rate. Losses must typically be recouped before additional performance fees can be paid.

    See also:
  • Are Hedge Fund Strategies Just About Leverage?
  • Hedge Fund: Kurtosis Definition & Explanation : Hedge Fund
  • Hedge Fund Strategies: Risk Arbitrage
  • Risk Transparency versus Position Transparency
  • Alternative Routes to Hedge Fund Return Replication
  • Posted on 3rd April 2010
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    Hedge Fund Databases: Sample Selection Bias

    In addition to self-selection bias, hedge fund databases can be prone to sample selection biases.

    Most databases only include funds that meet certain criteria (size, track record, etc.) Very poor managers will not survive long enough to be tracked.

    Furthermore, some databases include funds of funds or managed futures, while others do not. This effects comparability across databases.

    See also:
  • Self Selection Bias in Hedge Fund Databases
  • Hedge Fund Benchmarks
  • Biases in Detecting Efficient Market Anomalies
  • Are Hedge Fund Strategies Just About Leverage?
  • Hedge Fund: Kurtosis Definition & Explanation : Hedge Fund
  • Posted on 22nd March 2010
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    Risk Transparency versus Position Transparency

    A previous article noted that hedge funds tend to be fairly secretive, and discussed some of the reasons for that.  However, both investor pressure and the threat of regulation have led hedge funds to be somewhat more transparent over time, even if only selectively so.

    One way for funds to be more transparent is to disclose risk factors rather than specific positions. Thus, the hedge fund could say they have exposure to equities, interest rates, volatility, or other factors without noting specific positions. Investors are able to learn important information about their investments, including what types of risk they may need to diversify or hedge, but competitors do not get information they could use to either piggy-back or front-run the hedge fund.

    See also:
  • How Transparency Affects Stock Valuation
  • Evaluating Market Quality
  • Why do Hedge Funds Lack Transparency
  • Investing in Emerging Market Debt
  • Types of Alternative Investments
  • Posted on 12th March 2010
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    What is an Absolute Return Benchmark?

    A target rate of return that is not based on market returns. It could be a specific return, such as 10%, as opposed to exceeding the return on the S&P 500.

    See also:
  • Benchmark related statistics used to evaluate hedge funds
  • Properties of a Valid Investment Benchmark
  • Hedge Fund Benchmarks
  • Investment Objectives
  • Constructing a Custom Security Based Benchmark
  • Posted on 3rd March 2010
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    Self Selection Bias in Hedge Fund Databases

    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 Databases: Sample Selection Bias
  • Hedge Fund Benchmarks
  • Are Hedge Fund Strategies Just About Leverage?
  • Hedge Fund: Kurtosis Definition & Explanation : Hedge Fund
  • Hedge Fund Strategies: Risk Arbitrage
  • Posted on 22nd February 2010
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    Why do Hedge Funds Lack Transparency

    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:
  • Risk Transparency versus Position Transparency
  • Determinants of Funds of Hedge Funds Performance
  • Alternative Routes to Hedge Fund Return Replication
  • Types of Hedge Funds
  • Types of Alternative Investments
  • Posted on 12th February 2010
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