Alternative Beta Strategies and Hedge Fund Replication

276 Pages·2008·2.22 MB·English

by  Lars Jaeger

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Alternative Beta Strategies and Hedge
Fund Replication
Lars Jaeger
with Jeffrey Pease
i
P1:JYS
fm JWBK289-Jaeger August4,2008 14:18 Printer:Yettocome
i
P1:JYS
fm JWBK289-Jaeger August4,2008 14:18 Printer:Yettocome
Alternative Beta Strategies and Hedge
Fund Replication
i
P1:JYS
fm JWBK289-Jaeger August4,2008 14:18 Printer:Yettocome
Alternative Beta Strategies and Hedge
Fund Replication
Lars Jaeger
with Jeffrey Pease
i
P1:JYS
fm JWBK289-Jaeger August4,2008 14:18 Printer:Yettocome
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LibraryofCongressCataloging-in-PublicationData
Jaeger,Lars.
Alternativebetastrategiesandhedgefundreplication/LarsJaeger.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-0-470-75446-7(cloth:alk.paper) 1.Hedgefunds. I.Title.
HG4530.J3272008
332.64(cid:2)524–dc22
2008022826
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AcataloguerecordforthisbookisavailablefromtheBritishLibrary
ISBN978-0-470-75446-7
Typesetin10/12ptTimesbyAptaraInc.,NewDelhi,India
PrintedandboundinGreatBritainbyCPIAntonyRowe,Chippenham,Wiltshire
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Tomychildren,AnikaMai,KiraAnh,andTaliaLinh
iii
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ForothertitlesintheWileyFinanceSeries
pleaseseewww.wiley.com/finance
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Contents
Preface ix
1 BreakingtheBlackBox 1
1.1 Newpopularity,oldconfusion 1
1.2 Thechallengesofunderstandinghedgefunds 2
1.3 LeavingAlphaville 3
1.4 Thebeautyofbeta 4
1.5 Alternativeversustraditionalbeta 4
1.6 Thereplicationrevolution 5
1.7 Fulldisclosure 6
2 WhatAreHedgeFunds,WhereDidTheyComeFrom,andWhereAreThey
Going? 7
2.1 Characteristicsofhedgefunds 7
2.2 Hedgefundsasanassetclass 11
2.3 Taxonomyofhedgefunds 11
2.4 Myths,misperceptions,andrealitiesabouthedgefunds 15
2.5 Ashorthistoryofhedgefunds 22
2.6 Thehedgefundindustrytoday 26
2.7 Thefutureofhedgefunds–opportunitiesandchallenges 30
3 TheIndividualHedgeFundStrategies’Characteristics 37
3.1 EquityHedged–Long/ShortEquity 37
3.2 EquityHedged–EquityMarketNeutral 41
3.3 EquityHedged–ShortSelling 44
3.4 RelativeValue–general 45
3.5 RelativeValue–FixedIncomeArbitrage 46
3.6 RelativeValue–ConvertibleArbitrage 51
3.7 RelativeValue–VolatilityArbitrage 58
3.8 RelativeValue–CapitalStructureArbitrage 60
3.9 EventDriven–general 62
3.10 EventDriven–MergerArbitrage 64
3.11 EventDriven–DistressedSecurities 67
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vi Contents
3.12 EventDriven–RegulationD 69
3.13 Opportunistic–GlobalMacro 70
3.14 ManagedFutures 75
3.15 ManagedFutures–Systematic 76
3.16 ManagedFutures–Discretionary 79
3.17 Conclusionofthechapter 81
4 EmpiricalReturnandRiskPropertiesofHedgeFunds 83
4.1 WhentheSharperatioisnotsharpenough 83
4.2 Challenges of hedge fund performance measurement – the issue with
hedgefundindices 84
4.3 Sourcesofempiricaldata 89
4.4 Riskandreturnpropertiesofhedgefundstrategies 90
4.5 Comparisonwithequitiesandbonds 93
4.6 Deviationfromnormaldistribution 94
4.7 Unconditionalcorrelationproperties 94
4.8 Conditionalreturnsandcorrelations 98
4.9 Hedgefundbehaviorinextrememarketsituations 105
4.10 Benefitsofhedgefundsinatraditionalportfolio 107
4.11 Quantitativeportfoliooptimizationforhedgefundsrevisited 109
4.12 Summaryofempiricalproperties 112
4.13 Appendix:Dataprovidersforpasthedgefundperformance 113
5 TheDriversofHedgeFundReturns 117
5.1 Alphaversusbeta 117
5.2 Theenigmaofhedgefundreturns 119
5.3 Hedgefundreturns:howmuchisalpha? 121
5.4 Theefficientmarkethypothesis 123
5.5 Questioningtheefficientmarkethypothesis:behavioralfinance 125
5.6 The theoretical framework of modern finance: asset pricing models and
theinterpretationsofalpha 128
5.7 Systematicriskpremia:theprevalenceofbetaintheglobalcapitalmarkets 131
5.8 Riskpremiaandeconomicfunctions 138
5.9 Marketinefficiencies:the‘searchforalpha’ 140
5.10 Anillustrationofthenatureofhedgefundreturns 143
5.11 Thedecreaseofalpha 145
5.12 Thebeautyofalternativebeta 147
5.13 Thefutureofhedgefundcapacity 149
5.14 Momentumandvalue 150
5.15 Activestrategiesandoption-likereturns 152
5.16 Whymanagerskillmatters 154
5.17 Buyerbeware:somefinalwordsofcautionabouthedgefundreturns 155
6 AFirstApproachtoHedgeFundReplication–LinearFactorModelsand
TimeSeriesReplicationModels 157
6.1 RevisitingSharpe’sapproach 157
6.2 Understandinglinearfactoranalysis:criteriaforthefactormodelapproach 158