Younger funds of funds less volatile, more diversified and less leveraged: Why?
|Feb 17th, 2009 | Filed under: Academic Research, Editor's Pick, Today's Post | By: Alpha Male||
Given that Bernie Madoff had been (allegedly) running a hedge strategy for 2 decades by the time he packed it in, it’s not a huge surprise that many Madoff feeder funds weren’t spring chickens either. Some were nearly as old as Madoff’s fund management business itself. The seasoned funds of funds that invested in Madoff have now experienced a significant bump in their return volatility. Meanwhile, younger funds (say, under a few years old) are less likely to have been able to join the exclusive Madoff feeder fund club.
This situation might have come as little surprise to the authors of a study published in this quarter’s Journal of Alternative Investments. Ying Li and Jamshid Mehran of Indiana University examine the performance and risk profiles of “seasoned” and “new” funds of funds. Their article is available for a limited time at the Chartered Alternative Investment Analyst (CAIA) website.
Contrary to their image of naive and overconfident johnny-come-latelies, younger funds of funds actually have a lower volatility than older more established funds of funds. One of the reason for this is that gross leverage appears to be higher for the older funds than for the spring chickens (although as Li and Mehran point out, they estimate leverage by adding up the various beta exposures in a fund, so a higher volatility and higher implied leverage kind of go hand in hand).
And here’s a finding will surely make sense to Madoff victims: another reason for the higher volatility of seasoned funds of funds is that they tend to me more concentrated than newer funds of funds.
2001: A Fund of Funds Odyssey
Think there has been an explosion in funds of funds over the past few years? There may have been a lot of institutional assets flowing into funds of funds, but according to data presented in this study, the halcyon days for fund of funds launches actually happened in 2001 (see chart below from paper). More…
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