Hedge fund investing book

Professor Lo gives a masterful illustration of the problems in gauging hedge fund performance with his famous fantasy fund Capital Decimation Partners. As one of the leading researchers in the field, Lo sets the standard by establishing key concepts for the industry with this book. Focusing on hedge fund returns and trading strategies, risk characteristics, and potential for illiquidity, Lo brings to bear his always fresh and insightful thinking.

He examines the properties of returns and illiquidity in great detail and introduces an innovative concept of mean-variance-liquidity optimization, something that no other book on hedge funds has addressed. Naik, London Business School "This book provides a useful and very timely overview of key aspects of the hedge fund industry. It summarizes the basic properties of hedge fund returns, discusses why traditional performance measures may be misleading when analyzing hedge fund performance, and highlights important issues such as serial correlation, return smoothing, and illiquidity.

Brunnermeier, Princeton University Related Books. If so much wealth has been created, it must be because so much more wealth has been earned by their clients, hedge fund investors. There must be many other examples of increased wealth beyond just the hedge fund managers themselves. Well, like a lot of things it depends on how you add up the numbers. The hedge fund industry in its present form and size is a relatively new phenomenon.

Alfred Winslow Jones is widely credited with founding the first hedge fund in Jones was hedging, and he enjoyed considerable success through the s and s Mallaby, Hedge funds remained an obscure backwater of finance however, and although the number of hedge funds had increased to between and by , the to crash wiped most of them out. Even by , Tremont Partners, a research firm, could only identify 68 hedge funds Mallaby, Michael Steinhardt led a new generation of hedge fund managers, during the s and s, along with George Soros, Paul Jones, and a few others.

But hedge funds remained a cottage industry, restricted by U. Relative value was the expertise of Long Term Capital Management, the team of PhDs and Nobel Laureates that almost brought down the global financial system when their bets went awry in Lowenstein. Rather than signaling the demise of hedge funds however, this turned out to be the threshold of a new era of strong growth.

Investors began to pay attention to the uncorrelated and consistently positive returns hedge funds were able to generate. Following the dot. Institutional investors burned by technology stocks were open to alternative assets as a way to diversify risk, and the subsequent growth in the hedge fund industry kicked into high gear. It is worth noting that the vast majority of the capital invested in hedge funds has been there less than 10 years.

Digging into the Numbers To understand hedge fund returns you have to understand how the averages are calculated. Some other stock market averages are based on a float — adjusted market capitalization i. The stocks in the index are selected, either by a committee or based on a set of rules, and once chosen those companies stay in the index until they are acquired, go bankrupt, or are otherwise removed perhaps because they have performed badly and shrunk to where they no longer meet the criteria for inclusion.

Calculating hedge fund returns involves more judgment, and is in some ways as much art as science. First, hedge fund managers can choose whether or not to report their returns. Since hedge funds are not registered with the SEC, and hedge fund managers are largely unregulated, the decision on whether to report monthly returns to any of the well — known reporting services belongs to the hedge fund manager.

He can begin providing results when he wants, and can stop when he wants without giving a reason. Hedge fund managers are motivated to report returns when they are good, since the main advantage to a hedge fund in publishing returns is to attract attention from investors and grow their business through increased AUM.

This self — selection bias tends to make the returns of the hedge fund index appear to be higher than they should be Dichev, Lots of academic literature exists seeking to calculate how much the returns are inflated by this effect also known as survivor bias, since just as history is written by thevictors, only surviving hedge fund managers can report returns.

Small funds are more nimble, making it easier to exploit inefficiencies in stocks, bonds, derivatives, or any chosen market. Success brings with it size in the form of a larger base of AUM and the advantages of being small slowly dissipate.

Academic research has been done on the benefits of being small as well Boyson, A key element behind this strategy is the recognition that small, new hedge funds outperform their bigger, slower cousins. Almost every hedge fund I ever looked at had done very well in its early years.

That is how they came to be big and successful. Invariably the manager would maintain that his many other advantages deep research capability, broad industry knowledge, extensive contacts list would suffice, but it illustrates one of the many conflicting goals faced by hedge funds and their clients.

Investors want hedge funds to stay small so they can continue to exploit the inefficiencies that have brought the investor to this meeting with the hedge fund manager. In fact, while small managers will tell you small is beautiful, large managers will brag about greater access to meet with companies, negotiate better financing terms with prime brokers, hire smart analysts, and invest in infrastructure.

The result of all these challenges with calculating exactly how hedge funds have done is that generally the reported returns have been biased higher than they should be Jorion, However, in assessing how the industry has done, what seems absolutely clear is that you have to use an index that reflects the experience of the average investor. While individual hedge fund investors may have portfolios of hedge funds that are equally weighted so as to provide better diversification, clearly the investors in aggregate are more heavily invested in the larger funds.

Hedge Fund Research in Chicago publishes dozens of indices representing hedge fund returns. They break down the list by sector, geography, and style. Using returns from to , the index has an annual return of 7. So hedge funds handily beat equities, easily outperformed cash, and did a little better than high—grade corporate bonds. The returns are all based on the simple average return each year.

Hedge funds did best in the early years, when the industry was much smaller. Just as small hedge funds can do better than large ones, a small hedge fund industry has done better than a large one. When you adjust for the size of the hedge fund industry using AUM figures from Barclay-Hedge the story is completely different. Rather than generating a return of 7. There were fewer hedge fund investors in with far less money invested, but based on the strong results the few earned at that time, many more followed.

You can think of it as the difference between taking annual returns and averaging them known as time-weighted returns and returns weighted for the amount of money invested at each time known as asset-weighted returns. The manager then stumbles badly and loses 40 percent.

IRR 3 is pretty close to the return weighted by the amount of capital invested. The hedge fund is showing a positive return, while his investor has lost money. So is this performance good? Should a year of strong performance with a small number of clients be combined with a year of poor performance with more clients without any adjustment for size?

However, the hedge fund industry reports returns like mutual funds and apparently nobody has seen fit to challenge that. While nobody can claim to make money every year, part of what hedge funds are supposed to be providing is hedged exposure.

Unlike mutual funds and other long only managers, hedge funds can not only hedge but can also choose to be under-invested or even not invested. Hedge funds are even referred to as absolute return strategies and most managers will claim some insight about whether they should be taking lots of risk or being more defensive. While our investor in this case clearly had unfortunate timing in adding to his position, the hedge fund manager apparently knew no better.

In other words, how have all the investors done? It may or may not be relevant information. Few investors ask for it — in my opinion many more should.

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Hedge funds tend to come with an aura of mystique, since they have often been only available to accredited investors and requiring large minimum investments. You can take away a bit of that mystique and look under the hood by reading one of these excellent books on the topic of hedge funds.

In writing about the concepts behind the development and structure of hedge funds, Mallaby presents an argument that hedge funds, though often derided, are beneficial to the overall economy by virtue of providing a straightforward response to market forces and by the use of strategies such as arbitrage trading that efficiently correct mispricings or other anomalies in the market.

Wilson provides insights into the day-to-day operations of hedge funds and the activities of hedge fund managers, with regard to both trading and marketing a hedge fund. Wilson, a hedge fund consultant, wrote the book in essentially a textbook format, and it has, in fact, become standard reading on the hedge fund industry for financial professionals seeking the Certified Hedge Fund Professional CHP designation.

Hedgehogging by Barton Biggs Buy on Amazon Many of the most popular — and informative — books on the hedge fund industry are books that provide in-depth insights into the lives and minds of successful hedge fund managers. In addition to his entertaining life story, Biggs offers insightful and sometimes humorous, insights into investment strategies, classic mistakes that investors often make, and the high-finance world of hedge fund traders.

Market neutral trading strategies are a favored means of risk management in volatile market conditions, such as those that characterized the opening weeks of He provides both historical performance data on each strategy and numerous examples designed to make it as easy as possible for investors to understand how each trading strategy works. Top Hedge Fund Investors: Stories, Strategies, and Advice by Cathleen Rittereiser and Lawrence Kochard Amazon Buy on Amazon Authors Cathleen Rittereiser and Lawrence Kochard have put together an entertaining and educational book filled with information compiled from hundreds of interviews with hedge fund investors and managers, along with detailed information on common hedge fund trading strategies.

In the book, a number of highly successful hedge fund investors and managers, including investment analysts and directors for large institutional investors , and high-net-worth individuals HNWI share interesting stories from their own experiences in investing, along with specific investment strategies and helpful advice for other investors. The book manages to be both extremely engaging and entertaining while providing information that can be very helpful to both individual investors and professional money managers.

Jaeger Amazon Buy on Amazon All About Hedge Funds debunks several hedge fund myths and explains how any investor can take advantage of the high-potential returns of hedge funds while incorporating safeguards to limit their volatility and risk. This clear-headed, commonsense guide tells investors: What hedge funds are--and what they are not; Four key hedge fund strategies; How to incorporate hedge funds into an existing portfolio; Types of risk involved in hedge fund investing.

Hedge Funds for Dummies by Ann C. Logue Amazon Buy on Amazon This book from the "For Dummies" series will demystify hedge funds in an easy to understand way, using lay terminology and helpful infographics and charts. Wilson provides insights into the day-to-day operations of hedge funds and the activities of hedge fund managers, with regard to both trading and marketing a hedge fund.

Wilson, a hedge fund consultant, wrote the book in essentially a textbook format, and it has, in fact, become standard reading on the hedge fund industry for financial professionals seeking the Certified Hedge Fund Professional CHP designation. Hedgehogging by Barton Biggs Buy on Amazon Many of the most popular — and informative — books on the hedge fund industry are books that provide in-depth insights into the lives and minds of successful hedge fund managers.

In addition to his entertaining life story, Biggs offers insightful and sometimes humorous, insights into investment strategies, classic mistakes that investors often make, and the high-finance world of hedge fund traders. Market neutral trading strategies are a favored means of risk management in volatile market conditions, such as those that characterized the opening weeks of He provides both historical performance data on each strategy and numerous examples designed to make it as easy as possible for investors to understand how each trading strategy works.

Top Hedge Fund Investors: Stories, Strategies, and Advice by Cathleen Rittereiser and Lawrence Kochard Amazon Buy on Amazon Authors Cathleen Rittereiser and Lawrence Kochard have put together an entertaining and educational book filled with information compiled from hundreds of interviews with hedge fund investors and managers, along with detailed information on common hedge fund trading strategies. In the book, a number of highly successful hedge fund investors and managers, including investment analysts and directors for large institutional investors , and high-net-worth individuals HNWI share interesting stories from their own experiences in investing, along with specific investment strategies and helpful advice for other investors.

The book manages to be both extremely engaging and entertaining while providing information that can be very helpful to both individual investors and professional money managers. Jaeger Amazon Buy on Amazon All About Hedge Funds debunks several hedge fund myths and explains how any investor can take advantage of the high-potential returns of hedge funds while incorporating safeguards to limit their volatility and risk.

This clear-headed, commonsense guide tells investors: What hedge funds are--and what they are not; Four key hedge fund strategies; How to incorporate hedge funds into an existing portfolio; Types of risk involved in hedge fund investing. Hedge Funds for Dummies by Ann C. Logue Amazon Buy on Amazon This book from the "For Dummies" series will demystify hedge funds in an easy to understand way, using lay terminology and helpful infographics and charts.

It's a basic book about the complicated world of hedge funds. If you're interested in the topic and new to the game, consider getting this. This book gives a first-hand account of the process of setting up and running a hedge fund in a way that is easy to read and grasp.