Portfolio Management and Investment Analysis10.ppt

Under What Conditions do Hedge Funds Perform Well? Arguably, hedge funds prefer high levels of market volatility, market trending, plentiful ‘carry trades’ and plentiful corporate, economic or political ‘events’ (such as take-overs, bankruptcies or issuance). It is easier for hedge funds to operate when market liquidity is strong, when borrowing is inexpensive and where competition within a hedge fund strategy is limited. Ineichen (2002) and Liew (2003) suggests that poor performance might be related to strong asset flows. Strategies such as distressed debt, appear to generate lower risk-adjusted returns after periods of strong inward asset flow. Hedge Fund Size, Performance and Risk Gregoriou and Rouah (2002) find no evidence in favour of a size/ performance relationship. Ammann and Moerth (2005) find a negative relationship between fund size and performance (except for the smallest quintile of funds). Also, larger funds tend to have lower volatilities than smaller funds (but similar Sharpe ratios). Why might this be? – possibly due to: greater size allowing greater diversification larger funds taking less risk, to retain assets aggressive strategies being harder to implement in larger funds (due to market impact). Hedge Fund Indices A hedge fund index should offer an investable benchmark that is representative of the broad range of major strategies that hedge funds employ. For example, the SP hedge Fund Index was launched with 41 constituents grouped into three sub-indices: SP Arbitrage Index, SP Event-Driven Index and SP Directional/Tactical Index, which in turn represent a total of nine specific strategies. The strategies are equally weighted to ensure well-rounded representation of hedge fund investment approaches and to avoid overrepresentation of currently popular strategies. Index maintenance processes are transparent. Portfolio holdings are independently verified. Indices are published daily (accurate and timely reporting).?????? SP Hedge Fund Indices So