Part II of a new SEI report on hedge funds and adapting to survival.
Hedge Fund Operations and Risk Management
A FinCad white paper looks at the efficiencies and cost-effectiveness of outsourcing risk analysis.
The smallest of the four groups of hedge fund firms, those with AUM under $250 million, control only 6.3 percent of the industry's assets, yet pay roughly 19 percent of the aggregate business expenses. It's tough to be small, better to be medium sized, still better to be large, though it isn't necessarily best to be extra large.
In Jack Schwager's view, the hedge fund industry as a whole is not a "mirage" at all. But relying on the past track record of specific funds or strategies: that is a dangerous reliance upon a mirage. Perhaps suggest that Grandma should put her nest egg in a diversified fund of funds.
As David Belmont reminds us in his new paper for the Commonfund Institute, in the U.S. there are limits on the practrice of rehypothecation. A broker can only reuse in this way assets of up to 140 percent of the value of the client's liability to said broker. Intriguingly, in the U.K. there are no such statutory limits.
Operational risk within investment management firms can stem from many sources. Firms also have varying tolerance levels for accepting or handling such risk.
Institutional investors and consultants are by now very sensitive to the fact of fat tail risk, and are no longer confident that diversification among traditional asset classes is a sufficient approach to the management of this risk. Portfolio changes now underway reflect this heightened sensitivity.
Awkward and unexpected results from insolvency are among the legal risks to which inadequate financial market infrastructures (FMIs) can lead. There are also credit risks, liquidity risks, and in a future time of crisis or stress: contagion.
"This industry will perhaps never really shake off the aura of secrecy and inevitable rumor mill, but investors and risk managers need to really start to judge funds on the metric against which the funds judge themselves: performance."
The right question is not what were they thinking, but what were they feeling? Get organized about detailing what feelings are being acted out and you’ve landed on the missing link in risk prediction.
Peter Urbani looks at Cornish Fisher and modified VaR as a function of skewness.
Guest columnist Charles Hage looks at hedge fund risk and discusses the long and the short of it.
In spite of sketchy performance from some top managers, institutional investors remain committed to hedge funds and a large number are shopping for new relationships in 2012.
Alpha Hunters Andrew Timpson and Joseph Schlater of Busara Advisors talk about what it takes to get an emerging manager allocation.
Clearing within ten days after the transaction (T+10) was once the norm, though it now seems archaic. Clearing overnight or in a once-a-day cycle will in the years ahead become equally unsatisfactory. It may soon “become standard practice for risk managers and eventually traders to demand proof that their trades have been cleared mere seconds after execution.”
By Christopher Faille Passive and active investments are often contrasted as if the distinction is self-evident. It isn’t. Even for an unambitious long-only equity indexed fund, trades have to be executed in order to maintain the desired balance, and these trades can be executed either well or poorly, in ways that help or hurt the investor. [...]
In the search for the optimal level of automation, there is a vice of defect, a vice of excess, and a virtuous golden mean.
There are high hopes that the new UCITS framework that took effect in July could herald rationalisation amongst Europe’s regulated hedge funds. While tax factors could slow down the process, UCITS has plenty of other growth drivers besides cost savings.
Corporate CEOs aren't the only ones who dread the appearance of activist hedge fund managers on their radar screens. Activists are giving the accounting departments pause as well, according to a new paper by Hall and Trombley.
The adage that everything in moderation is a good thing doesn't necessarily apply to funds of hedge funds, according to a recent academic report.
By Christopher Faille Hedge funds are accustomed to outsourcing a variety of daily activities, from front to back office. Many do get nervous, though, about how far their outsourcing should go. Their skittishness increases as such proposals encroach upon the way they generate alpha, the matters that must be kept secret: idea generation, supportive research, a [...]
By Christopher Faille A presentation by Samuel Kunz, chief investment officer of the Policeman’s Annuity and Benefit Fund, Chicago, to the CFA Institute 2011 Asset and Risk Allocation conference addressed the pros and cons of “risk parity.” His presentation makes it seem that risk-parity portfolios (RPP) and the Capital Asset Pricing Model (CAPM) are sibling rivals. [...]
By Christopher Faille It might be the subject of a Sesame Street episode. “R is an important letter. It stands for Rate and Return and Risk-Free and lots of other words!” Yet, like Oscar the Grouch if deprived of his garbage can, R has lost its fixed abode. Much of the mathematics of finance over the last [...]
In any economic system, the fixed-income market plays an essential role as one of the principal ways of financing enterprise (be it corporate or sovereign). Research shows that at the end of 2010, the global bond market had amounts outstanding of over US$95 trillion (to put that in context, the World Bank reported the total [...]
Hedge funds are already being laid to blame for the latest market rout, whether true or rhetoric. And the worst is likely yet to come.
By Christopher Faille The press still seems to be discovering “fat tails” and “black swans.” In July, news outlets gave admiring coverage to the International Monetary Fund’s expression of interest in the ideas of Nassim Taleb, the perhaps-overexposed philosopher who made the phrase “black swan” a cliché upon the success of his 2007 book of that [...]
Professor Neil Johnson talks about the DNA of financial markets with AllAboutAlpha's Vikas Shah
Two economists cogently contend that looking at developments in hedge funds' monthly risk profile will be most revealing.
A recent comic strip featured a somewhat ambitionless twentysomething relating that she had seen her cat lick its own back and her dog catch its tail, fulfilling their lifelong goals all before she had even formulated ones of her own. Asset managers prefer not to see the market catch its tail – it means deep drawdowns for their portfolios. A recent research paper, however, suggests that it's better to try to catch the tail – and shorten it – than to hope it won't happen.
A CMRA/IAFE study of the AXA Rosenberg case shows that model risk may not be on the radar screens of many quant funds.
It's a new paradigm for prime brokers still looking to develop and expand on their hedge fund relationships. The types of offerings - and the infrastructure hedge funds demand - are a whole new ballgame.
A perfectly "hedged" fund is one which has no downside risk. Its payoff relative to the market or some other benchmark is the same as that of the fund plus a put option that provides protection against the downside. In the real world...
The European Central Bank’s latest regular financial stability review uses the word “normalisation” a lot. But what does that mean?
Risk Aggregation has been expensive, and prohibitively so for some, whether it’s in-house or out-sourced. That may be about to change, but just as Skype phone calls are not always the best quality, so too some investors will still want to go further than the free solution.
Vikas Shah discusses the "left tail" with Mark Spitznagel, founder and CIO of Universa Investments.
In the alpha world, skill often depends on the support of other factors. Some call them pedigree, process and performance, and rank them in that order. There's only one problem: despite the best pedigree, and the best process, performance can suffer tremendously when something unpredictable occurs – a black swan or tail risk.
Optimism not seen since pre-2008/09 markets leads managers to invest in their firms as well as the markets.
If you drive a hedge fund, best to have some kind of insurance, though what it will cost you will depend more on the kind of car you drive than on your driving record.
A recent study suggests to at least one mass media outlet that hedge funds should mind their own business and not by nosy about other hedge funds' trades. But a closer reading of the study suggests to us that it's extremely difficult to measure the vast array of social interactions in Hedgistan.
Many commentators point to the mismatch between the liquidity terms of funds of funds and those of their underlying managers as a reason for the challenges faced by many funds of funds. But do the numbers support this conclusion?
Two and a half years have past since the global credit meltdown and there's still concern about the suspected systemic risk of hedge funds. The investigation's going in the right direction, but the real clues are in the footprints, according to the U.K. Financial Services Authority's latest report.
For some investors, the hedge fund world is assumed to be riddled with potential land mines and threats of heavy gunfire. Which is why finding managers who stick to the "Green Zone" is good practice, according to a new white paper.
Is the proof in the pudding? Detecting fraud and operational risks through hedge fund performance and reportingJan 10th, 2011 | Filed under: Academic Research, Hedge Fund Operations and Risk Management, Today's Post
If only you could just ask a hedge fund manager if he was cooking the books...
Like having snow tires, hedge fund risk modeling can better predict how a vehicle will perform in terrible weather.
To thrive in a newly open and transparent world, hedge fund managers need to lose their inhibitions in front of investors, who are demanding more transparency and accountability than ever, according to a recent report.