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27 Cards in this Set
- Front
- Back
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Younger Funds |
Often are less likely to manage their vol out of fear of losing assets and establishing bad reputations early |
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Empirical Evidence on when managers tend to increase their funds vol: |
1) Incentive is at the money 2) Fund has much liquidity 3)Funds NAV has been under the HWM for some time and Managers grow impatient |
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Fund of Funds vs Single Manager |
Single Manager can me multi strategy investing in sub managers who are part of same organization Fund of Funds invests in multiple hedge funds, 2 layer of fees, as of 2014 1,752/8,367 where FOFs |
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3 advantages of FoF |
1) Reflect actual investment experience of investors in diversified hedge funds 2) Databases of FOF have fewer biases than databases on individual hedge funds 3)Net performance doesn't include costs associated with due diligence or portfolio construction. Assumed by individual hedge fund investors not reflected in returns |
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Short-bias funds |
Lowest returns of any hedge fund, , lower than global stocks over a full-market cycle |
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Event Driven |
-Consistently earn small profits, but periodically suffer large losses. -Large neg skew leptokurtosis -off-balance sheet risk -Similar to sellers of put options |
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Convergent Strategies |
- Profit when value spreads become tighter --Selling financial Market insurance against market events |
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Short-Vol Exposures |
- Risk exposures that result in losses when return volatiles increase like in event-driven and relative arb |
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Absolute Return Strategies |
1) Returns with little or no skew 2)low or neg kurtosis Exception of being able to consistently generate positive returns, with defensive fund of funds bc of low correlation and std |
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Diversified Strategies |
-High returns, low drawdowns, reasonable risks -Sharpe exceeds stock market -normally distributed -Held value in 2008 managed futures made money, macro funds maintained value |
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Caveats related to HF performance |
1) Shock to hedge fund market can "reverberate" through to many other HF strategies 2) Evidence shows overestimate future expected results, Lower returns bc of competition 3) Biases in data (selection or survivorship) Inflate est ann returns by 70-450bps |
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HF Calculate Performance |
Calculate net of fees 1) Frequency- Incentive fees are calculated annually where index returns are calculated monthly 2) Fee bias: Could increase fees for new investors so index can over estimate returns for new investors |
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4 Data Bias's Hedge Funds |
1) Survivorship bias 2) Selection Bias- 3) Instant History 4) Liquidation bias |
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Survivorship bias |
1) Survivorship bias- Survived funds have excess return- Effects database but not index bc past performance still indicative in index just not future |
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Selection Bias |
2) Selection Bias- Managers selectively report so bias in only best reporting-Effects data base and past/future index returns-Also could be hazard rate which restricts hedge funds for certain dates |
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Instant History |
3) Instant History- Backfilled performance similar to reported current performance-Only effect future performance for index not past bc index providers do not changed the index's history when a new manager is added to the index |
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Liquidation bias |
4) Liquidation bias- Investors liquidating stop reporting dont care about raising new assetsIndex performance increased |
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Opportunistic |
Performance relative to benchmark but eliminates tracking error factor & long-only constraint. |
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Cap Weighted vs Equally Weighted |
There is no industry standard. This is one of the reasons for the differences in performance of hedge fund indices.However, studies have shown that cap-weighted and equally-weighted indices have similar correlations to equity and bond indices, which counters the argument that hedge fund indices should be cap-weighted because most asset classes are benchmarked against cap-weighted indices |
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Event Driven Hedge Funds & Put Options |
Event-driven hedge funds sell insurance against the failure of events such as mergers. This can be viewed as selling put options that exhibit moderate gains when the merger goes through, but exhibit large losses when the merger fails (as the target's stock price will decrease).Event-driven funds have short volatility exposure because they have negative exposure to major events, and events can cause market volatility to increase. If a merger is completed, the associated put option expires unexercised. |
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Survivorship bias |
Survivorship bias is measured as the average return of surviving funds in excess of the average return of all funds. The bias results when a database reports the performance of fund managers who survived a period of time and excludes the performance of managers who did not survive. If it exists in a database or an index, it results in upwardly biased returns. It typically affects hedge fund databases. It does not affect the historical performance of most published indices, but does affect the historical performance of newly constructed indices. Historical returns are overestimated by 0.01% to about 3.5% per year. |
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The CAIA curriculum classifies market neutral hedge funds as which of the following strategy types? |
Market neutral hedge funds are equity funds (along with long/short and short selling funds). |
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Long-Term Capital Management (LTCM) most likely collapse |
LTCM collected option-like premiums by speculating on the convergence of security prices, which worked well for a period of time. However, when the Russian government defaulted on its bonds in 1998, there was a flight to quality and security prices moved in the opposite direction to that predicted by LTCM (i.e., relative prices diverged). Due to its short put option profile and high degree of leverage, LTCM suffered huge losses. |
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Which of the following hedge fund strategies are primarily exposed to the same type of risk? |
The key risk exposure of both event-driven and relative value is event risk. Both strategies bet that some event will take place some time in the future and so are exposed to unexpected changes in conditions associated with that event. |
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Relative value strategies include: |
Relative value strategies include fixed income arbitrage, volatility arbitrage, and convertible bond arbitrage. |
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constructing a hedge fund index, which of the following should be considered? |
A representative index of hedge fund performance should include both open and closed hedge funds. The trade-off in building the index is between it representing the entire hedge fund universe and it representing a smaller set of open hedge funds in which invests can be made. |
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annuity view of hedge fund fees |
Under the annuity view of hedge fund fees, the manager earns large fees by consistently generating positive returns, attracting new investors, and staying in business as long as possible to continue earning fees on compounded returns and new capital. Increasing volatility of the fund's assets jeopardizes the longevity of the fund and may scare off potential new investors. |
