Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks / Edition 1

Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks / Edition 1

by Frank J. Travers
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Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks / Edition 1

A detailed, step-by-step book covering the entire hedge fundevaluation process

Investing in hedge funds is different from investing in otherasset classes. There is much less publicly available informationabout hedge funds performance than there is about mutual funds orindividual stocks. Consequently, investing in this class requiresmore sophisticated investment knowledge, greater due diligence,and, in many cases, a better-developed ability to evaluateinvestment managers.

Hedge Fund Analysis provides a broad framework of how toapproach this endeavor, from initial screening to analyticaltechniques, interviewing skills, and legal and contractnegotiations. Along the way, it demonstrates a variety ofmechanisms for monitoring and tracking hedge funds and theunderlying hedge fund portfolios—explaining each stage of theprocess in minute detail and providing specific examples whichfully explain the opportunities and challenges you'll face eachstep of the way.

  • Provides a detailed look at how to source hedge funds, screenthrough them, and rank their strengths and weaknesses
  • Lays out a thorough process for evaluating funds, from initialinterviews to performance analysis to onsite meetings
  • Reveals what questions to ask by strategy in order tounderstand the underlying risk factors associated with each
  • Highlights non-investment analysis, including operational duediligence and risk management, as integral elements in theprocess

Written by a financial professional with over twenty years ofexperience conducting investment manager due diligence, this bookwill put you in a position to make more informed decisions wheninvesting in hedge funds.

Product Details

ISBN-13: 9781118175460
Publisher: Wiley
Publication date: 10/02/2012
Series: Wiley Finance Series , #778
Pages: 416
Product dimensions: 5.90(w) x 9.10(h) x 1.50(d)

About the Author

FRANK J. TRAVERS, CFA, is a portfolio manager at LarchLane Advisors. He has over two decades of experience analyzingtraditional long-only, private equity, and hedge fund strategies.Previously, he was the director of research at First PeninsulaCapital and a portfolio manager at Pine Street Advisors and CICGroup. Additionally, he held positions as the director of duediligence at CIBC World Markets, associate director ofinternational equity research at Evaluation Associates, and senioranalyst positions at Morgan Stanley Asset Management and RCB Trust.Travers is the author of Investment Manager Analysis: AComprehensive Guide to Portfolio Selection, Monitoring, andOptimization, also published by Wiley. He received his BS infinance from St. John's University and his MBA from FordhamUniversity.

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Table of Contents

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

What People are Saying About This

From the Publisher

"Starting from hedge funds's roots in Shogunate Japan, FrankTravers has written a truly comprehensive book on hedge fundanalysis.  Pulling from his years of experience as a hedgefund allocator, Travers offers insights that heretofore could onlybe learned on the job.  With a colorful writing style and arobust sense of history, Hedge Fund Analysis is asinteresting  for the experience hedge fund professional as itis compelling for the novice.  This book is a must read foranyone interested in hedge fund research."—BruceMacDonald, Chief Investment Officer, SimpleAlternatives

“As the title suggests, it is a no non-sense guide to theexercise of selecting hedge funds, that uses a sober and methodicallanguage – among the few whimsical items are the fictionalhedge fund organisation (FCM) and some dryquips.”—Opalesque

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