Hedge Funds: Performance, Risk and Capital Formation

1
Hedge Funds Performance, Risk and Capital
Formation

• Fung, Hsieh, Naik, Ramadorai
• Discussion by
• Otto van Hemert
• SIFR, University of Amsterdam
• December 22nd, 2005

2
Main Results

• Time-varying alpha and beta in FoF
• Persistence alpha providers among FoFs
• Hedge fund style alphas for
• Relative value
• Event driven
• Multi-strategy
• Unexplained alpha for FoF often negative
• Return-chasing capital for have beta FoFs only

3
FoF data proxy for HF data?

• FoF data (20-30 of industry), 1994-2002/2004
• Mitigate survivorship and delisting bias
• High correlation aggregate HF with aggregate FoF
  return (beta argument)
• We use the performance of FoFs as indicators of
  the performance of the hedge fund industry as a
  whole, p.8
• Alpha FoF vs. alpha HF (alpha argument)
• Management fee
• Fund picking ability
• Analogy discount/premium on NAV for REITs
• Unexplained alpha time-varying

4
Who has alpha?

• Average FoF alpha only positive for October 1998
  March 2000 period
• bull market is a beta argument
• Have alpha styles
• Relative value
• Event driven
• Multi-strategy
• What about volatility?
• Persistent
• Likely important for have alpha styles
• Link with collapse LTCM (1st breakpoint)

5
What about volatility?
6
Capital flows

• FoFs that showed alpha have higher inflow of
  capital
• Return chasing behavior more present for FoFs
  that have not shown alpha
• Sophisticated and non-sophisticated investors
• Are the sophisticated investors institutional
  investors?
• Defiance one-size-fits-all fee structure
• Larger inflow of capital is already extra reward
• How much to emphasize this point in current paper?

7
Nitty Gritty

• Obtain estimates of the alpha of the average
  FoF in the presence of time-varying factor
  loading, p.10
• Alternatively
• time-varying intercepts and factor loadings
• Quality of FoF survival probability
• Money back no termination risk
• No money back reflected in alpha

8
Wrapping up

• Clearly written rich paper
• FoF data proxy for HF data?
• What about volatility?
• How much to emphasize organisation/fee structure
  in current paper?