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Hedge Funds
Hedge Funds represent a broad category of
investments within the alternative investments asset class. They are
investment funds that generally seek absolute returns uncorrelated to the
financial markets through a broad variety of skill-based or speculative strategies.
As the hedge fund industry has evolved
over the past several years, hedge funds have developed numerous innovative
investment strategies--as a result, hedge funds might more appropriately be
called "Perpetual Investment Partnerships" since they do not always
represent a hedge-based strategy, yet almost all represent an absolute
return strategy within a perpetual fund structure.
This section provides summaries about the
hedge fund industry and quantitative analyses of hedge funds
and the industry across various market conditions. Although an affiliate of
Crestmont Research does manage and advise portfolios of hedge funds for qualified high
net worth and institutional investors, the presentations and analyses presented in this
section are provided solely for perspectives on the hedge fund industry and
to further our research in this field. The terms of use for all
materials are detailed below.
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UPDATED THROUGH 2006
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Hedge Fund
Industry Summary
These slides are part of a presentation that has been provided to a
number of constituents interested in understanding the basics of the
overall hedge fund industry and the hedge fund industry in Texas (a
particular focus of
Crestmont). The presentation has been expanded and updated to
include more details and information. Formal group presentations
and individual consultations are available.
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Hedge Fund Style
Pictures
Pictures tell the story that statistics understate.
This series of graphs present the daily or monthly returns of four types
of investment funds in relation to the stock market. The graphs
reflect the daily or monthly changes for each style of investment fund (in red) in
relation to the changes in the stock market on the same day or month. The returns have been
sorted starting with the stock market's greatest decline on up to the greatest
increase—this places the down days on the left and the up days on the right
of each graph. These contrasting pictures emphasize some of the
differences between mutual funds and hedge funds. It is obvious
that mutual funds generally track the performance of the stock market;
whereas, many hedge fund styles demonstrate return
patterns relatively unrelated to the stock market. |
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Stock Market
Return Environment
Poor performance across various hedge fund indexes often
coincides with significant declines in the stock market; however, most
market conditions are relatively favorable for hedge funds. Ranges
are presented relating to the standard deviation ranges around the
average (mean)
return. Although most diversified hedge fund indexes are
relatively uncorrelated to the general stock market, they are not
necessarily unaffected in all market conditions. In summary,
except for periods of relatively extreme market declines or disruption, the
diversified hedge fund indexes provide more consistent returns than the
general stock market. |
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You Get What
You Pay For
The current mutual fund industry 'review' has highlighted
the high level of fees that are pervasive in that industry. For
funds that seek to emulate an index (i.e. "Relative Return" investing),
fees are a recognized drag on performance. However, for funds that
generally seek to employ skill-based investing and risk management
techniques (i.e. "Absolute Return" investing; Hedge Funds), this study
assessed whether fees are a drag on performance or a cost of expertise. As with
professional sports and many other examples, there seems to be a strong relationship between
the level of performance and level of compensation—funds of hedge funds (investment managers
that place investors' capital across multiple hedge funds) with higher
fee structures had better returns and lower risk measures than lower fee
managers. When skill is the source of return, it appears that the
old adage "you get what you pay for" again rings true.
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Hedge Fund
Tortoise
The purpose of this presentation is to assess returns
from stocks, bonds, and hedge funds over secular bull and secular bear
cycles. Stock and bond market returns for investors are driven by
returns in those markets (so-called "relative returns," returns that are
relative to the performance of the market). Hedge fund returns are
driven by a philosophy of seeking absolute returns (i.e. returns that
are positive regardless of the direction of the markets). Hedge
funds tend to deliver more consistent returns that can compound over
time and potentially deliver greater cumulative returns over the
complete cycle.
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Burying The Myth
Of
Survivorship Bias
This article presents the results of a research effort to assess the
impact of survivorship bias within hedge fund indexes. Survivorship bias
represents the tendency for indexes to be overstated due to the
exclusion of poor performing funds. Since hedge fund indexes include
funds that report voluntarily, there are a number of factors that affect
survivorship bias. The results of two studies indicate that more funds
stopped reporting after periods of positive results (closing to new
investors) than due to negative performance (failure).
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Hedge
Fund/Private Equity Convergence
Historically, firms in the private equity sector used
"serial investment funds" to acquire
and finance private businesses. Hedge fund firms, with their "perpetual
investment partnerships," traded and
arbitraged financial securities. As the investment industry
continues to evolve with more sophisticated strategies, risk
diversification, and constantly developing approaches to returns, the
previously segregated private equity and hedge fund sectors are
converging or--as some on each side would characterize it--invading.
This presentation explores a high-profile trend and identifies ways that
these two approaches to investment management can collaborate
effectively.
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(updated with
final 2006 results) |
Rowing vs. The
Rollercoaster
Why are so many of the most knowledgeable institutions
and individuals shifting away from investment portfolios that have been
concen-trated in stocks and bonds toward a more diversified and
risk-managed profile? The tools and resources are now available to
permit investors of all sizes to use this enhanced approach and be
successful. This article describes the dynamics and benefits of
seeking more consistent, absolute returns rather than investing simply
for the relative returns of the stock market. Since it relates to
the stock market and since it uses hedge fund indexes as a proxy to
illustrate absolute returns, it is posted in both the Stock Market and
Hedge Funds sections. |
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Hedge Funds:
Myths & Facts
Never has an industry so extensively studied by “experts”
produced such a surplus of myths and misunderstandings. Many of these
myths could easily be clarified with a call or two to knowledge-able
industry professionals or participants. Too often, a seemingly logical
statement that sounds-good-when-you-say-it-fast becomes accepted
conventional wisdom despite the reams of evidence weighted against it.
Although many of these experts are well-intentioned, they may not be
sufficiently well-informed. The solution lies in further and enhanced
collaboration between academia, industry, and the press. |
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