The Complete Guide to Hedge Funds and Hedge Fund Strategies PDF

The Complete Guide to Hedge Funds and Hedge Fund Strategies PDF

The Complete Guide to Hedge Funds and Hedge Fund Strategies PDF One-stop-guide to the hedge fund industry, investment and trading strategies adopted by hedge funds and the industry’s regulation. For anyone with an interest in investing or managing funds, it presents everything practitioners need to know to understand these investment vehicles from their theoretical underpinnings, to how they work in practice.

Category: Hedge Fund

Author: Daniel Capocci 

Language: English

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Since the middle of the 20th century, wealthy individuals have invested their capital alongside talented traders in opaque, lightly regulated investment vehicles designed to safeguard investor anonymity and to allow capital accumulation in relative privacy, in contrast to publicly available regulated vehicles such as mutual funds. These exclusive, opaque investment vehicles, managed by eclectic investment professionals, have come to be referred to as hedge funds.

Since the turn of the century, anecdotal evidence has revealed a steady increase in the allocations of institutional investors in hedge funds. Institutional investors, in contrast to private investors, prefer transparency, emphasize corporate governance, and demand regulatory compliance from their third-party managers. In addition, they generally prefer moderate risk-adjusted returns, and stress persistency rather than periodic out-sized returns and their attendant volatility. This is a significant change in the clientele of the hedge fund industry – a change that affects both the return and risk profile of hedge funds as well as hedge fund managers’ business models.

Despite these changes and the 2008 financial crisis, the hedge fund industry has flourished, accumulating substantial amounts of capital from these diverse investors. What is it about hedge funds that attracts investors and continues to do so consistently over decades? Daniel Capocci’s book gives us important clues to answering this question. It provides valuable insights into hedge fund strategies and a framework for assessing hedge fund products.

Chapter 1 offers some illuminating vignettes of a number of legendary hedge fund managers, beginning with Alfred Winslow Jones’s fund in 1949. The brief history of these hedge fund legends hints at how successful hedge fund managers not only have to navigate through dynamic, and at times stormy, investment environments, but must also evolve their business models to adapt to changing investor demands and regulations. Daniel’s balanced approach, illustrating difficult concepts by way of well-chosen examples and statistical evidence, sets the framework for an effective, comprehensive description of complex hedge fund investment strategies in the subsequent chapters.

The second and fourth chapters of the book take the investors’ perspective and ask the questions: How have hedge funds performed? And what should I be wary of? Anecdotal evidence suggests that institutional investors prefer large, well-capitalized hedge fund firms. For investors considering investing in a hedge fund, Daniel provides a helpful checklist of risks they should be aware of – risk factors cover both strategy risk as well as operational risk.

Chapter 3 tackles the core subject of this book: How do hedge fund managers make their money? Or, What is inside their investment toolbox? If coming up with a definition for hedge funds is difficult, describing hedge fund managers’ investment strategies in a succinct fashion without undue reference to quantitative models is, to say the least, even more challenging. Here Daniel artfully applies the same balanced approach of insightful examples interlaced with empirical data on how different strategy performs, taking the reader on an insightful tour into the type of investment opportunities that attract hedge fund managers, how portfolio positions are crafted, and how the investments are managed over time.

Through the first decade of the 21st century there has been a continuing trend for the industry’s assets to be concentrated in the hands of a few mega large hedge fund firms. Hedge fund managers are the quintessence of active management, and are certainly no strangers to applying leverage to enhance their bets. This rising trend of risk capital being concentrated in the hands of a small number of leveraged speculators operating in opaque and lightly-regulated investment vehicles inevitably catches the attention of, and at times creates discomfort for, the regulators.

In Chapter 5, Daniel takes the reader through some of that decade’s stressful events in global capital markets. The chapter examines how hedge funds performed during crisis conditions and their market impact. The last chapter rounds off the text with a discussion on the issues relating to hedge fund regulations.

Overall, this is an excellent ‘go to’ text for answers to many key questions on the hedge fund industry – answers that are presented with a fine balance between rigorous analysis and intuitive, practical examples.

William Fung, Visiting Research Professor of Finance,
London Business School, and
Vice chairman, CFA Research Foundation

Table of contents- The Complete Guide to Hedge Funds and Hedge Fund Strategies PDF

Foreword xxxi

William Fung

Acknowledgements xxxiii

Preface xxxiv

1 What Is a Hedge Fund? 1

1 General definition of hedge funds 1

2 Hedge funds over time 5

3 Hedge funds around the world 14

4 A few big names from the hedge fund industry 45

5 Summary 54

2 Hedge Fund Characteristics 55

1 Database providers 55

2 Constitution of a hedge fund 65

3 The structure of a hedge fund 73

4 Hedge funds and risk 75

5 Hedge fund investors 88

6 The constraints 94

7 The fees 98

8 Short selling 106

9 Leverage 108

10 Gross and net exposition 109

11 Active trading 113

12 Other characteristics of the hedge fund industry 114

13 Hedge funds and other alternative investment products 119

14 The strengths and weaknesses of hedge funds 120

15 Comparison between funds and managed accounts 124

16 Replication 125

17 New structures 126

18 Summary 133

3 Investment Strategies 135

1 General classification 136

2 Equity market neutral 137

3 Relative value 156

4 Mortgage-backed securities 170

5 Convertible arbitrage 181

6 Event driven 194

7 Merger arbitrage 209

8 Distressed securities 223

9 PIPE funds 232

10 Volatility Arbitrage 244

11 Multi-strategy 251

12 Asset-based lending 258

13 Long/short equity 272

14 Emerging markets 280

15 Sector funds 291

16 Credit/high yield 303

17 Short selling 314

18 Macro 320

19 Commodity trading advisors 330

20 Fund of funds 347

21 Other investment strategies 361

22 Summary 375

Appendix A: Bond rating 375

Appendix B: Convertibles basics 376

Appendix C: Duration, modified duration and convexity 377

Appendix D: Hedge Fund Research Indices construction 379

Appendix E: The Greeks 379

4 Hedge Fund Performance Over Time 382

1 Data 382

2 Performance of the hedge fund industry 387Contents xv

3 Hedge fund performance and volatility by strategy 391

4 Performance during extreme market conditions 420

5 Academic research 427

6 Return decomposition 433

7 Inserting hedge funds into a classical portfolio 436

8 Correlation analysis 438

9 Summary 455

5 Hedge Funds, LTCM and Recent Crises 456

1 Long-term capital management 456

2 Hedge funds and financial crisis 465

3 Summary 485

6 Hedge Funds, Regulation and Mutual Funds 487

1 Hedge fund regulation 488

2 Hedge funds vs. mutual funds 516

3 Hedge funds vs. mutual funds: the other main differences 521

4 Portfolio diversification 523

5 Summary 527

Conclusion 529

Appendix: The CAIA Association 532

Notes 533

Bibliography 541

Index 553


‘Hedge funds and the hedge fund industry are by definition at the leading edge of developments in the asset management sector and constantly evolving. Investors require a fundamental understanding of strategies and market structure. Capocci’s book brings a timely and useful update to previous publications as well as a deep insight into the quantitative approach necessary to implement hedge fund investments.’

– Florence Lombard, CEO, Chartered Alternative Investment Analyst Association

‘Daniel has produced an exhaustive study of the hedge fund industry. He covers structure, evolution, performance, personality and regulation amongst key topics. Hedge funds are here to stay, even if they evolve in structure. Given that, this book is an essential resource for all those seeking to invest in or understand this highly diverse asset class. Daniel’s perspective is unique having worked in the industry and seen it first hand but also having gone away to think deeply and research the industry further with his doctorate.’

– Ian Mukherjee, founder and Chief Investment Officer, Amiya Capital

‘This book is an admirable reference point for anyone interested in a comprehensive treatment of hedge fund strategies and performance, particularly for those funds domiciled outside the United States.’

– Stephen Brown, David S. Loeb Professor of Finance, New York University – Stern School of Business

‘A timely reference guide for the industry as it moves onto a more mature footing. An essential resource for practitioners and students of the hedge fund industry.’

– Tom Kehoe, Alternative Investment Management Association (AIMA)

‘This is an excellent ‘go to’ text for answers to many key questions on the hedge fund industry – answers that are presented with a fine balance between rigorous analysis and intuitive, practical examples.’

– William Fung, Visiting research Professor of Finance, London Business School, Vice chairman, CFA Research Foundation

About the author

Daniel Capocci   is Senior Investment Manager at Architas Multi-Manager, a member of the Global AXA Group and has been analysing the hedge fund industry for 15 years firstly as an academic and secondly as a hedge fund investor. On the academic side, Daniel has published research in globally-recognized professional and academic journals, including the Journal of Empirical Finance, the European Journal of Finance and the International Journal of Financial Economics and he has presented at numerous academic and professional conferences. On the investment side, he has spent the bulk of his career analysing individual hedge funds and managing hedge fund portfolios, first investing in offshore funds and more recently focussing his research on alternative UCITS. Daniel published his first book on the topic ‘Introduction to Hedge Funds’ in 2004 and has contributed to nine other books related to the subject over the years. He holds a PhD from HEC Management School of the University of Liège in Belgium, which focused on the ‘Analysis of Hedge Fund Strategies’. He is Chartered Alternative Investment Analyst (CAIA) holder since 2006 and CAIA Chapter Executive. Daniel is Research Associate with the HEC School of Management at the University of Liège in Belgium and with the EDHEC Risk and Asset Management Centre.

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