Hedge Fund AnalysisAn In-Depth Guide to Evaluating Return Potential and Assessing Risks
Wiley Finance 1. Aufl.
A detailed, step-by-step book covering the entire hedge fund evaluation process Investing in hedge funds is different from investing in other asset classes. There is much less publicly available information about hedge funds performance than there is about mutual funds or individual stocks. Consequently, investing in this class requires more sophisticated investment knowledge, greater due diligence, and, in many cases, a better-developed ability to evaluate investment managers. Hedge Fund Analysis provides a broad framework of how to approach this endeavor, from initial screening to analytical techniques, interviewing skills, and legal and contract negotiations. Along the way, it demonstrates a variety of mechanisms for monitoring and tracking hedge funds and the underlying hedge fund portfolios—explaining each stage of the process in minute detail and providing specific examples which fully explain the opportunities and challenges you'll face each step of the way. Provides a detailed look at how to source hedge funds, screen through them, and rank their strengths and weaknesses Lays out a thorough process for evaluating funds, from initial interviews to performance analysis to onsite meetings Reveals what questions to ask by strategy in order to understand the underlying risk factors associated with each Highlights non-investment analysis, including operational due diligence and risk management, as integral elements in the process Written by a financial professional with over twenty years of experience conducting investment manager due diligence, this book will put you in a position to make more informed decisions when investing in hedge funds.
Introduction xi PART ONE Background CHAPTER 1 Hedge Fund History 3 So Who Invented the Hedge Fund? 4 The Samurai 4 The Academic 5 The Legend 14 The Innovator 17 CHAPTER 2 Hedge Fund Asset Class 29 Definition 29 Hedge Fund Structure 31 Hedge Fund Strategies 32 Advantages of Allocating to Hedge Funds 43 Hedge Fund Size and Age Impacts Performance 52 PART TWO Hedge Fund Due Diligence CHAPTER 3 Due Diligence Process 57 Key Areas of Focus within Each Component of Due Diligence 57 The Due Diligence Process Highlighted in This Book 60 Putting It All Together 67 Some Initial Thoughts 70 CHAPTER 4 Initial Data Collection 77 Data Collection 78 Due Diligence Questionnaire (DDQ) 80 Fictional Capital Management 80 Other Materials 106 Further Analysis 108 13F Analysis 116 Hedge Fund Journal 119 CHAPTER 5 Initial Interview 121 Initial Call or Meeting 121 Phone Interviews 122 Meeting Notes 139 CHAPTER 6 Quantitative Analysis 145 Performance Measures 146 Absolute Return Measures 146 Absolute Risk Measures 154 Regression-Based Statistics 164 Peer Group Analysis 168 CHAPTER 7 Portfolio Analysis 173 Attribution Analysis 174 Fundamental Analysis 189 Evaluating Portfolio Data 193 CHAPTER 8 Onsite Interviews 217 Onsite Meeting Strategies 219 One-on-One Meetings 219 Meeting with More Than One Person 222 Different Perspectives 223 Meeting Notes 224 Onsite Interviews at Fictional Capital Management (FCM) 228 CHAPTER 9 Operational Due Diligence 259 Case Study: Bayou Fund 259 Definition 261 Importance of Operational Due Diligence 263 Categorization of Operational Due Diligence 267 Interview with FCM Operational Staff 301 CHAPTER 10 Risk Due Diligence 309 Graphical Depiction of Hedge Fund Risks 312 Risk Due Diligence 314 Factor Decomposition Analysis 330 Interview with FCM Risk Manager 333 CHAPTER 11 Reference and Background Checks 339 Onlist and Offlist References 340 Internet and Social Media 341 Contacting References 343 Problematic References 346 Whose References Should You Check? 349 How Many Reference Calls Are Enough? 350 Background Checks 352 Summary of Reference Calls for FCM 353 CHAPTER 12 Hedge Fund Scoring Model and Decision Making 357 Hedge Fund Scoring Model 358 Putting It All Together 374 About the Author 379 Index 381
FRANK J. TRAVERS, CFA, is a portfolio manager at Larch Lane Advisors. He has over two decades of experience analyzing traditional long-only, private equity, and hedge fund strategies. Previously, he was the director of research at First Peninsula Capital and a portfolio manager at Pine Street Advisors and CIC Group. Additionally, he held positions as the director of due diligence at CIBC World Markets, associate director of international equity research at Evaluation Associates, and senior analyst positions at Morgan Stanley Asset Management and RCB Trust. Travers is the author of Investment Manager Analysis: A Comprehensive Guide to Portfolio Selection, Monitoring, and Optimization, also published by Wiley. He received his BS in finance from St. John's University and his MBA from Fordham University.
With more than 8,000 hedge funds in existence today, the process of identifying, analyzing, allocating, and actively monitoring a short list of funds that meet your specific needs is harder than ever before. While effective hedge fund analysis can be conducted in various ways and employ a myriad of models and techniques, the basic elements of the process are always the same. It requires answering essential questions that involve all aspects of the hedge fund business, including personnel, underlying investment strategy and risk, competitive advantages or "edge," back office and operations, administration, legal matters, financial issues, marketing, client service, transparency, liquidity, reporting, and more. With over two decades of experience analyzing alternative and traditional investment strategies and managers, author Frank Travers knows what it takes to excel at this difficult endeavor. And now, with Hedge Fund Analysis, he shares his extensive insights with you. Divided into two informative parts, this comprehensive resource provides background information—including the history of hedge funds, a discussion of their pros and cons, and how the asset class fits into diversified institutional portfolios—in Part One, and then moves on to detail a template for hedge fund due diligence in Part Two. To illustrate how the process works, Travers has created a fictional hedge fund organization and takes you through each step of the due diligence process, peeling back the onion one layer at a time so that you'll ultimately discover how to distill the massive amounts of information you're bombarded with and make informed and intelligent investment decisions. Throughout the book, you'll gain valuable insights on: Data collection and interviewing techniques Performance and strategy analysis Operational and risk assessments Legal and financial analysis Quantitative hedge fund scoring And much more Created for the serious financial professional as well as anyone else looking to evaluate and understand how hedge funds work, this no-nonsense guide will put you in a better position to excel in this competitive arena.
Praise for Hedge Fund Analysis "A comprehensive and thoughtful, step-by-step guide to finding, evaluating, and performing due diligence on hedge funds, written by a seasoned professional. With its practical, real-life examples and its valuable insights into the industry, it should be a must-read for investors interested in hedge funds." —Frank Brochin, Chief Investment Officer, StoneWater Capital LLC "Hedge Fund Analysis is a clear, concise, and thorough review of the due diligence process and serves as an excellent guide for anyone looking to identify talent in this opaque corner of the investment universe. The book provides a valuable introduction to a complicated exercise for those new to the industry and is an excellent refresher for the experienced analyst." —D. Jeffrey Dramstad, CFA, Director, Investment Strategy and Due Diligence, Clark Enterprises, Inc. "Conducting thorough analysis of all aspects of a hedge fund can be a challenging, multidisciplinary exercise. This book provides a great introduction for investors seeking to evaluate both investment and operational risks in hedge funds, and highlights the importance of detailed operational due diligence." —Jason Scharfman, Managing Partner, Corgentum Consulting, LLC "Travers provides a comprehensive, yet accessible guide to hedge fund analysis that belongs on the reference shelf of any investor." —Meredith Jones, Director, Rothstein Kass "Hedge Fund Analysis is a thoughtful, thorough book on the hedge fund industry and manager selection process. Travers explains in plain English and great detail the difficult process of finding and selecting a strong hedge fund manager. This book is a must-read for anyone trying to select a hedge fund manager." —Christopher Ainsworth, President, California Hedge Fund Association
"Starting from hedge funds's roots in Shogunate Japan, Frank Travers has written a truly comprehensive book on hedge fund analysis. Pulling from his years of experience as a hedge fund allocator, Travers offers insights that heretofore could only be learned on the job. With a colorful writing style and a robust sense of history, Hedge Fund Analysis is as interesting for the experience hedge fund professional as it is compelling for the novice. This book is a must read for anyone interested in hedge fund research."—Bruce MacDonald, Chief Investment Officer, Simple Alternatives “As the title suggests, it is a no non-sense guide to the exercise of selecting hedge funds, that uses a sober and methodical language – among the few whimsical items are the fictional hedge fund organisation (FCM) and some dry quips.”—Opalesque
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