Funds Of Hedge Funds Research Articles

The Italian hedge funds industry: An empirical analysis of performance and persistence

This study analyses Italian hedge funds performance and persistence. The peculiarity of the Italian hedge fund industry is that 95% of the hedge funds are funds of hedge funds (FoHF), whereas only 5% of them employ other investment styles. Using monthly data on FoHF provided by MondoHedge, we examine the impact of both market variables and funds’ own characteristics on funds performance using panel data. We find that the European, the Japanese and the emerging markets equity markets, and the commodity market have a positive impact on Italian FoHF performances, while the US Bond Market negatively affects them. Moreover, we find performance fees and notice days to have a negative impact on funds performances. Finally, we test the presence of performance persistence. Employing two different nonparametric methods, we find that funds performances are persistent on a monthly and quarterly basis, while the regression-based parametric method provides evidence of persistence only on a monthly basis.

The challenges of launching, rating and regulating funds of hedge funds

Funds of hedge funds (FOF) are the preferred channel to access hedge funds by investors. FOF add value through selecting the best managers from a large universe, performing due diligence, and monitoring investments and risk. Initial funding of an FOF is a difficult task. Despite holding positions in well-established funds, new FOF are not able to use this fact to gain investments because the composition of the portfolio should not be disclosed. We analyse some of the difficulties of funding start-up FOF, the rating used by rating agencies, and the possible negative effects of regulation by the G8.

Data Envelopment Analysis

Data envelopment analysis (DEA) is a data-oriented approach for performance evaluation and benchmarking when trade-offs on multiple performance measures and benchmarks are not completely available. There are relative efficiencies and inefficiencies in using DEA in classifying funds of hedge funds (FOF). FOFs provide absolute returns and have non-linear returns because of long-short positions, derivatives, and option-like fee contracts, resulting in significant skewness and kurtosis. Thus the inclusion of FOFs in investor portfolios calls for performance appraisal methodologies that are appropriate for handling the asymmetric returns they produce, such as DEA, and not comparison to traditional passive and active benchmarks. While selecting FOFs can be arduous, DEA can shed light on and further validate the process. <b>TOPICS:</b>Real assets/alternative investments/private equity, statistical methods

The Topography of Hedge Fund Returns 2006

In this series of plots, we review the opportunity sets of 9 hedge fund strategies, as well as funds-of hedge funds, over the past 17 years. The data includes all managers that existed for all 12 months of each calendar year in the HFR database. In these plots, we view the topography of the distributions - higher mountain peaks indicate more return concentration as a percentage of hedge funds each year. We also plot the average return each year on the terrain. We are currently in an era of compressed returns (high peaked means in 2005, slightly more dispersion in 2006).

The performance and diversification benefits of funds of hedge funds

We examine the performance and diversification potential of 332 funds of hedge funds (FOHFs) for the period from January 1990 to May 2003. Consistent with prior studies, we find that FOHFs appear to underperform the hedge fund index on a risk-adjusted basis. However, FOHFs have characteristics that offset their apparent underperformance. Their returns do not suffer from negative skewness that is a feature of many hedge fund strategies. Relative to the hedge fund index, we find that FOHFs have lower correlations with stock indices in both bull and bear markets, making them a better diversification tool in equity portfolios. For bond portfolios, however, FOHFs have no diversification advantage over hedge fund indexing.

Funds of hedge funds: Ethics of this black box strategy

This paper deals with the opaqueness and the ethics of reporting practices of funds of hedge funds (FOFs) by examining this increasingly popular black box alternative investment strategy. Numerous statistical reports sent out by FOFs managers to institutional investors have been examined and it has been discovered that many FOFs (a basket of hedge funds) present very basic and elementary statistics. Furthermore, the findings suggest that hedge funds do not adhere to the ethical and reporting standards to which mutual funds are subject. Better ethical reporting standards should be established. In addition, advanced quantitative and qualitative techniques on behalf of hedge fund managers should be introduced to properly assist and educate institutional investors as well as pension fund managers in making appropriate choices on behalf of their investors.

Risk-Adjusted Performance of Funds of Hedge Funds Using a Modified Sharpe Ratio

Many institutional investors use the traditional Sharpe ratio today to examine the risk-adjusted performance of funds of hedge funds (FOFs). However, this could pose problems due to the non-normal returns of this alternative asset class. A modified value at risk (VaR) and modified Sharpe ratio solves the problem and can provide a superior tool for correctly measuring risk-adjusted performance. In this article, the authors rank 30 funds of hedge funds according to the Sharpe and modified Sharpe ratio. Their results indicate that the modified Sharpe is lower and more accurate when examining non-normal returns.

Hedge-Fund Benchmarks: Information Content and Biases

We discuss the information content and potential measurement biases in hedge-fund benchmarks. Hedge-fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases. In addition, broad-based indexes mask the diversity of individual hedge-fund return characteristics. Consequently, these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds. The approach to constructing hedge-fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge-fund performance is to observe the investment experience of hedge-fund investors themselves—the funds of hedge funds (FOFs). In terms of measurement biases, returns of FOFs can deliver a cleaner estimate of the investment experience of hedge-fund investors than the traditional approach. In terms of risk characteristics, indexes of FOFs are more indicative of the demand-side dynamics driven by hedge-fund investors' preferences than are broad-based indexes. Therefore, indexes of FOFs can provide valuable information for assessing the hedge-fund industry's performance.