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Hedge Fund Analysis: An in-depth Guide to Evaluating Return Potential and Assessing Risksby Frank J. Travers
Synopses & Reviews
With more than 8,000 hedge funds in existence today, the process of identifying, analyzing, allocating, and actively monitoring a short list of funds that meet your specific needs is harder than ever before.
While effective hedge fund analysis can be conducted in various ways and employ a myriad of models and techniques, the basic elements of the process are always the same. It requires answering essential questions that involve all aspects of the hedge fund business, including personnel, underlying investment strategy and risk, competitive advantages or "edge," back office and operations, administration, legal matters, financial issues, marketing, client service, transparency, liquidity, reporting, and more.
With over two decades of experience analyzing alternative and traditional investment strategies and managers, author Frank Travers knows what it takes to excel at this difficult endeavor. And now, with Hedge Fund Analysis, he shares his extensive insights with you.
Divided into two informative parts, this comprehensive resource provides background information—including the history of hedge funds, a discussion of their pros and cons, and how the asset class fits into diversified institutional portfolios—in Part One, and then moves on to detail a template for hedge fund due diligence in Part Two. To illustrate how the process works, Travers has created a fictional hedge fund organization and takes you through each step of the due diligence process, peeling back the onion one layer at a time so that you'll ultimately discover how to distill the massive amounts of information you're bombarded with and make informed and intelligent investment decisions. Throughout the book, you'll gain valuable insights on:
Created for the serious financial professional as well as anyone else looking to evaluate and understand how hedge funds work, this no-nonsense guide will put you in a better position to excel in this competitive arena.
Praise for Hedge Fund Analysis
"A comprehensive and thoughtful, step-by-step guide to finding, evaluating, and performing due diligence on hedge funds, written by a seasoned professional. With its practical, real-life examples and its valuable insights into the industry, it should be a must-read for investors interested in hedge funds."
—Frank Brochin, Chief Investment Officer, StoneWater Capital LLC
"Hedge Fund Analysis is a clear, concise, and thorough review of the due diligence process and serves as an excellent guide for anyone looking to identify talent in this opaque corner of the investment universe. The book provides a valuable introduction to a complicated exercise for those new to the industry and is an excellent refresher for the experienced analyst."
—D. Jeffrey Dramstad, CFA, Director, Investment Strategy and Due Diligence, Clark Enterprises, Inc.
"Conducting thorough analysis of all aspects of a hedge fund can be a challenging, multidisciplinary exercise. This book provides a great introduction for investors seeking to evaluate both investment and operational risks in hedge funds, and highlights the importance of detailed operational due diligence."
—Jason Scharfman, Managing Partner, Corgentum Consulting, LLC
"Travers provides a comprehensive, yet accessible guide to hedge fund analysis that belongs on the reference shelf of any investor."
—Meredith Jones, Director, Rothstein Kass
"Hedge Fund Analysis is a thoughtful, thorough book on the hedge fund industry and manager selection process. Travers explains in plain English and great detail the difficult process of finding and selecting a strong hedge fund manager. This book is a must-read for anyone trying to select a hedge fund manager."
—Christopher Ainsworth, President, California Hedge Fund Association
A detailed, step-by-step book covering the entire hedge fund evaluation process
Investing in hedge funds is different from investing in other asset classes. There is much less publicly available information about hedge funds performance than there is about mutual funds or individual stocks. Consequently, investing in this class requires more sophisticated investment knowledge, greater due diligence, and, in many cases, a better-developed ability to evaluate investment managers.
Hedge Fund Analysis provides a broad framework of how to approach this endeavor, from initial screening to analytical techniques, interviewing skills, and legal and contract negotiations. Along the way, it demonstrates a variety of mechanisms for monitoring and tracking hedge funds and the underlying hedge fund portfolios—explaining each stage of the process in minute detail and providing specific examples which fully explain the opportunities and challenges you'll face each step of the way.
Written by a financial professional with over twenty years of experience conducting investment manager due diligence, this book will put you in a position to make more informed decisions when investing in hedge funds.
About the Author
FRANK J. TRAVERS, CFA, is a portfolio manager at Larch Lane Advisors. He has over two decades of experience analyzing traditional long-only, private equity, and hedge fund strategies. Previously, he was the director of research at First Peninsula Capital and a portfolio manager at Pine Street Advisors and CIC Group. Additionally, he held positions as the director of due diligence at CIBC World Markets, associate director of international equity research at Evaluation Associates, and senior analyst positions at Morgan Stanley Asset Management and RCB Trust. Travers is the author of Investment Manager Analysis: A Comprehensive Guide to Portfolio Selection, Monitoring, and Optimization, also published by Wiley. He received his BS in finance from St. John's University and his MBA from Fordham University.
Table of Contents
PART ONE Background
CHAPTER 1 Hedge Fund History 3
So Who Invented the Hedge Fund? 4
The Samurai 4
The Academic 5
The Legend 14
The Innovator 17
CHAPTER 2 Hedge Fund Asset Class 29
Hedge Fund Structure 31
Hedge Fund Strategies 32
Advantages of Allocating to Hedge Funds 43
Hedge Fund Size and Age Impacts Performance 52
PART TWO Hedge Fund Due Diligence
CHAPTER 3 Due Diligence Process 57
Key Areas of Focus within Each Component of Due Diligence 57
The Due Diligence Process Highlighted in This Book 60
Putting It All Together 67
Some Initial Thoughts 70
CHAPTER 4 Initial Data Collection 77
Data Collection 78
Due Diligence Questionnaire (DDQ) 80
Fictional Capital Management 80
Other Materials 106
Further Analysis 108
13F Analysis 116
Hedge Fund Journal 119
CHAPTER 5 Initial Interview 121
Initial Call or Meeting 121
Phone Interviews 122
Meeting Notes 139
CHAPTER 6 Quantitative Analysis 145
Performance Measures 146
Absolute Return Measures 146
Absolute Risk Measures 154
Regression-Based Statistics 164
Peer Group Analysis 168
CHAPTER 7 Portfolio Analysis 173
Attribution Analysis 174
Fundamental Analysis 189
Evaluating Portfolio Data 193
CHAPTER 8 Onsite Interviews 217
Onsite Meeting Strategies 219
One-on-One Meetings 219
Meeting with More Than One Person 222
Different Perspectives 223
Meeting Notes 224
Onsite Interviews at Fictional Capital Management (FCM) 228
CHAPTER 9 Operational Due Diligence 259
Case Study: Bayou Fund 259
Importance of Operational Due Diligence 263
Categorization of Operational Due Diligence 267
Interview with FCM Operational Staff 301
CHAPTER 10 Risk Due Diligence 309
Graphical Depiction of Hedge Fund Risks 312
Risk Due Diligence 314
Factor Decomposition Analysis 330
Interview with FCM Risk Manager 333
CHAPTER 11 Reference and Background Checks 339
Onlist and Offlist References 340
Internet and Social Media 341
Contacting References 343
Problematic References 346
Whose References Should You Check? 349
How Many Reference Calls Are Enough? 350
Background Checks 352
Summary of Reference Calls for FCM 353
CHAPTER 12 Hedge Fund Scoring Model and Decision Making 357
Hedge Fund Scoring Model 358
Putting It All Together 374
About the Author 379
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