Table Of Contenti
Hedge Funds
FINANCIAL MARKETS AND INVESTMENTS SERIES
H. Kent Baker and Greg Filbeck, Series Editors
Portfolio Theory and Management
Edited by H. Kent Baker and Greg Filbeck
Public Real Estate Markets and Investments
Edited by H. Kent Baker and Peter Chinloy
Private Real Estate Markets and Investments
Edited by H. Kent Baker and Peter Chinloy
Investment Risk Management
Edited by H. Kent Baker and Greg Filbeck
Private Equity: Opportunities and Risks
Edited by H. Kent Baker, Greg Filbeck, and Halil Kiymaz
Mutual Funds and Exchange- Traded Funds: Building Blocks to Wealth
Edited by H. Kent Baker, Greg Filbeck, and Halil Kiymaz
Financial Behavior: Players, Services, Products, and Markets
Edited by H. Kent Baker, Greg Filbeck, and Victor Ricciardi
iii
Hedge Funds
STRUCTURE, STRATEGIES, AND PERFORMANCE
H. KENT BAKER
and
GREG FILBECK
1
1
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Library of Congress Cataloging-in-Publication Data
Names: Baker, H. Kent (Harold Kent), 1944– editor. | Filbeck, Greg, editor.
Title: Hedge funds : structure, strategies, and performance / [edited by] H. Kent Baker and Greg Filbeck.
Description: New York City : Oxford University Press, 2017. | Includes index.
Identifiers: LCCN 2016041675 | ISBN 9780190607371 (hardcover)
Subjects: LCSH: Hedge funds.
Classification: LCC HG4530 .H38834 2017 | DDC 332.64/524—dc23
LC record available at https://lccn.loc.gov/2016041675
9 8 7 6 5 4 3 2 1
Printed by Sheridan Books, Inc., United States of America
v
Contents
List of Figures ix
List of Tables xiii
Acknowledgments xv
About the Editors xvii
About the Contributors xix
Abbreviations xxxiii
Part One INTRODUCTION
1. Hedge Funds Fundamentals 3
H. KENT BAKER AND GREG FILBECK
2. The Economics of Hedge Funds 22
SHANTANU DUTTA, ARUP GANGULY, AND LIN GE
3. The Life Cycle of Hedge Funds: A New Perspective 38
MILA GETMANSKY SHERMAN AND
RACHEL (KYUNGYEON) KOH
4. Characteristics of Successful Hedge Fund Managers 60
ASHRAFEE T. HOSSAIN, SAMIR SAADI, AND MAXIM TREFF
Part Two THE STRUCTURE OF HEDGE FUNDS
5. Hedge Fund Organization 75
DOUGLAS CUMMING, NA DAI, AND SOFIA JOHAN
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vi Contents
6. Hedge Fund Governance 93
LAMIA CHOUROU, ASHRAFEE T. HOSSAIN,
AND SAMIR SAADI
7. Activist Hedge Funds 107
TONY CALENDA, CHRISTOPHER MILLIKEN,
AND ANDREW C. SPIELER
8. The Tax Framework of Hedge Funds 125
FRANÇOIS- SERGE LHABITANT AND MICHEL BROCARD
9. Compensation and Incentives in Hedge Funds 147
GARRETT C. C. SMITH AND GAURAV GUPTA
10. Offshore Hedge Funds 162
ROBERTO J. SANTILLÁN- SALGADO AND
JUAN JOSÉ GARCÍA- SANTOS
Part Three INVESTMENT STRATEGIES OF HEDGE FUNDS
11. Directional Equity Strategies of Hedge Funds 185
ORESTE AULETA AND FILIPPO STEFANINI
12. Event-D riven Hedge Fund Strategies 207
CAROLINE FARRELLY AND FRANÇOIS- SERGE LHABITANT
13. Global Derivatives Hedge Fund Strategies 228
CHRISTOPHER J. BARNES, EHSAN NIKBAKHT,
AND ANDREW C. SPIELER
14. Relative Value Hedge Fund Strategies 242
GEORGE DIKANAROV, JOSEPH MCBRIDE,
AND ANDREW C. SPIELER
15. Multistrategy Hedge Funds 259
PAUL- HENRI BAYART- DE- GERMONT AND DANIEL CAPOCCI
vii
Contents vii
Part Four RISKS AND REGULATION
16. Risk Measurement and Management for Hedge Funds 283
GUILLAUME WEISANG
17. Hedge Funds and Systemic Risk 305
WULF A. KAAL AND TIMOTHY A. KRAUSE
18. Operational Risk Management for Hedge Funds 320
CLAUS HUBER AND DANIEL IMFELD
19. Hedge Fund Due Diligence 344
JASON SCHARFMAN
20. Hedge Fund Regulation 359
WULF A. KAAL AND DALE A. OESTERLE
Part Five HEDGE FUND PERFORMANCE
21. Issues in Hedge Fund Research 379
THUY BUI AND ABHISHEK GANGULY
22. Hedge Fund Pricing 394
DAVID HAMPTON
23. Evaluating Hedge Fund Performance 415
DAVID M. SMITH
24. Financial Crises and Evaporating Diversification Benefits
of Hedge Funds 439
MONICA BILLIO, MILA GETMANSKY SHERMAN,
AND LORIANA PELIZZON
25. Hedge Fund Replication 460
MIKHAIL TUPITSYN AND PAUL LAJBCYGIER
26. Hedge Funds and Performance Persistence 491
NAN QIN AND YING WANG
viii Contents
27. Benchmarking and Bias in Hedge Funds 510
JEFFREY S. SMITH, KENNETH SMALL,
AND PHILLIP NJOROGE
28. Style Analysis and Consistency 524
WILLIAM R. MCCUMBER AND JYOTSAANA PARAJULI
Part Six ISSUES, TRENDS, AND FUTURE PROSPECTS
OF HEDGE FUNDS
29. Current Hedge Fund Debates and Controversies 547
DIANNA C. PREECE
30. Trends and Future Prospects of Hedge Funds 566
HUNTER M. HOLZHAUER
Discussion Questions and Answers (Chapters 2–30) 585
Index 623
ix
List of Figures
2.1 Growth in Activism Campaigns in the United States, 2010 to 2015 30
3.1 Yearly Percentage Changes in the Number of Funds, 1985 to 2014 39
3.2 Assets under Management in the Hedge Fund Industry, 1985 to 2014 39
3.3 Concavity and Convexity 43
3.4 Returns versus Past Asset Sizes for All Hedge Funds and Individual
Categories 44
3.5 Reasons for Dropping Hedge Funds in the Lipper TASS Database 54
3.6 Payoff to a Call Option 55
5.1 Typical Parties Appointed to Operate a Hedge Fund 76
7.1 Activist Hedge Fund Returns versus Other Hedge Fund Strategies 114
7.2 S&P U.S. Activist Interest Index Total Return versus S&P U.S. Broad Market
Index Total Return 115
8.1 Major Locations Used to Legally Register Hedge Funds 126
8.2 Major Locations Used to Manage Hedge Funds 126
8.3 Typical Structure of a U.S. Hedge Fund Set Up as a Limited Partnership 128
8.4 Typical Structure for a Pure Offshore Hedge Fund 140
10.1 Domicile of Offshore Hedge Funds 175
10.2 Domicile of Onshore Hedge Funds 176
10.3 Number of Funds Following Different Strategies Classified as Offshore and
Onshore Hedge Funds 177
10.4 Total Net Assets by Hedge Fund Strategy 178
10.5 Yield to Date of Onshore and Offshore Hedge Funds 179
10.6 Offshore and Onshore Hedge Funds Average Total Returns over
Different Periods 180
10.7 Maximum and Minimum Returns for Offshore and Onshore Hedge
Funds 180
11.1 Net Exposure in Nominal and Beta- Adjusted Terms for a Hypothetical
Long/ Short Equity Fund 189
11.2 Evolution of Gross and Net Exposure for a Long/ Short Equity Fund 191
11.3 Evolution of Gross and Net Exposure for a Long/ Short Equity Fund with a
Variable Bias 192
11.4 Breakdown of Exposures by Sector for a Long/S hort Equity Fund 193
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