Guide to Hedge Funds: What They Are, What They Do, Their Risks, Their Advantages
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Hedge fund managers are the new "masters of the universe." The best earn more than $1 billion a year and are so sought after that they can afford to turn investor money away. The funds they run have, to some extent, established an alternative financial system, replacing banks as lenders to risky companies, acting as providers of liquidity to markets and insurers of last resort for risks such as hurricanes, and replacing pension funds and mutual funds as the most significant investors in many companies—even in some cases buying companies outright. The revised and updated second edition of this lively guide sheds much needed light on the world of hedge funds by explaining what they are, what they do, who the main players are, the regulations affecting them, the arguments as to whether they are a force for good or bad, and what the future holds for them.
"More people have a view about hedge funds than know about them. Philip Coggan bridges the knowledge gap in this clearly written guide. Every chapter is a goldmine of information and analysis, making it easy to learn about hedge funds. No investor, no investment adviser, no trustee, no dinner-table conversationalist should express opinions on the sector until they have read this book."
—Elroy Dimson, BGI Professor of Investment Management, London Business School
"While much has been written about hedge fund strategies and their (occasionally spectacular) failures, we have not yet seen a general primer to help the investor understand the world of hedge funds. Philip Coggan presents us with exactly that—a well-written, succinct summary of a world we all need to understand better."
—Rob Arnott, Chairman of Research Affiliates and Editor Emeritus of the Financial Analysts Journal
including distressed debt, real estate, event-driven (company restructurings and spin-offs) and merger arbitrage. Fortress Group Fortress burst into prominence as the first big “alternative asset” manager to float on the New York Stock Exchange in February 2007. The listing was massively successful, with investors clamouring to get access to the small amount of stock that was on offer (less than 10% of the company), although the share price subsequently lost ground. Before the float, Nomura, a
traded “over-the-counter”, rather than on any recognised exchange. There may not be a market price available. And the instruments may be so complex that no outside party can match the expertise of the hedge fund manager. 69 Hedge Funds.indb 69 8/11/07 16:38:49 GUIDE TO HEDGE FUNDS In such circumstances, the best that independent valuers and investors may be able to achieve is to understand the models that the manager is using to price the assets. The laissez-faire attitude of regulators
launched, but 717 folded; academic studies suggest that almost half of hedge funds fail to last five years. Hedge funds are generally established by people with a successful record in trading or fund management. They then persuade their existing clients (or employer) to give them enough capital to make a start, topping that figure up with their own money, or that of friends and relations. The first two years are usually crucial. If they are successful, more clients will come their way. If not,
liquidity risk (an inability to sell your positions or have the right level of margin on a leveraged portfolio), counterparty risk (that the firm you trade with fails to pay up) and operational risk (which covers anything from valuing positions incorrectly to failing to comply with regulations). Trew has accordingly developed what he calls the “seven pillars of risk assessment”, which he uses to subject the funds to a series of stresses, including the time it would take to offload the vast bulk
works for a short term, then it falls apart. The factor analysis suddenly starts failing. The factors don’t gradually decline in importance; they go from 40% to zero. Clones will be fine in a trending market but will struggle when the trends break. There certainly will be some barriers to the acceptance of clones. One oddity is that the investment banks have been among the first to develop such strategies, even though they earn hundreds of millions from the existing industry. Will it make sense,