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Hedge Fund of Funds Investing: An Investor's Guide

  • Hardcover
The hedge fund industry continues to grow by leaps and bounds, and within this universe, the socalled "fund of funds" is king. Comprised of multiple-manager portfolios bundled together as a single multi-hedge fund product, this risk-balancing vehicle has emerged as the instrument of choice for the astute investment professional. "Hedge Fund of Funds Investingwalks the steps for creating, combining, and managing investments with multiple hedge funds as a fund of funds—to achieve specific investment objectives as well as the overall strategic diversification so highly valued by institutional and individual investors alike. Nicholas explains the building blocks of a fund of funds and how they can be incorporated into a traditional portfolio. He also teaches how to evaluate risks, estimate potential returns, and choose statistical measurement methods.
Hedge Fund of Funds Investing: An Investor's Guide
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An Investors Guide. .
Nicholas is chairman of Hedge Fund Research, L.L.C., a research and consulting firm that specializes in alternative investments.
Introduction.

Part 1 The Fund of Funds Industry.
1 Fund of Funds in the Hedge Fund Industry.
Hedge Fund Investment Options.
Direct Investment.
Customized Portfolio.
Index Fund.
Fund of Funds Investment.
Growth of Funds of Funds.
Hedge Fund Industry Characteristics and Trends.
Hedge Fund Investment Structure.
Legal Structure.
Numbers of Investors and Minimum Investment Size.
Reporting and Disclosure.
Liquidity.
Lockup.
Summary.
  
2 Hedge Fund Investment Strategies.
Convertible Arbitrage.
Distressed Securities.
Emerging Markets.
Equity Hedge.
Equity Market Neutral.
Event Driven.
Fixed Income.
Macro.
Market Timing.
Merger Arbitrage.
Relative Value Arbitrage.
Sector Long/Short.
Short Selling/Short Bias.
Summary.

3 Fund of Funds Mechanics and the Two-Tiered Structure.
Structural Considerations.
Organization Structure.
Company Structure.
Domicile.
Subscriptions and Registration Exemptions.
Minimum Investment Size.
Fees.
Lockup, Redemption, and Liquidity.
The Fund of Funds Management Company.
Manager Due Diligence and Selection.
Risk Management.
Operations.
Performance and Exposure Reporting.
Summary.

4 Advantages and Disadvantages of Funds of Funds Advantages.
Diversification.
Due Diligence.
Risk Management.
Portfolio Management: Strategy Selection and Manager Selection.
Access to Funds/Capacity.
Consolidated Reporting.
Fees.
Performance.
Disadvantages.
Exposure to Other Investors? Cash Flows.
Fees.
Lack of Control/Customization.
Decreased Transparency.
Summary.

Part 2 Historical Performance of Funds of Funds.
5 Performance of Funds of Funds Fund of Funds Substrategies.
HFRI Fund of Funds Conservative Index.
HFRI Fund of Funds Strategic Index.
HFRI Fund of Funds Diversified Index.
HFRI Fund of Funds Market Defensive Index.
Fund of Funds Returns 1990-2002.
Fund of Funds Returns 1990-2002.
Fund of Funds Volatility 1990-2002.
Fund of Funds Volatility 1990-2002.
Fund of Funds Return Versus Volatility 1990-2002.
Fund of Funds Risk-Adjusted Returns--The Sharpe Ratio.
Sharpe Ratio 1990-2002.
Sharpe Ratio 2000-2002.
Preservation of Capital 1990-2002.
Fund of Funds Performance Versus Equities.
Fund of Funds Performance During Bear and Bull Markets.
Average Performance During Negative Periods and Positive Periods 1990-2002.
Return Distribution 1990-2002.
Fund of Funds Performance During Periods of Market Stress.
Summary.

6 Fund of Funds in a Portfolio With Traditional Assets.
Linear Analysis of Returns.
Adding Funds of Funds to a Traditional Portfolio.
Achieving Superior Risk-Adjusted Returns.
Summary.

Part 3 A Commonsense Approach to Selecting Funds of Funds.
7 Defining Objectives and Identifying Candidates Step 1: Define Objectives and Parameters.
Objectives.
Parameters.
Strategy Restrictions.
Structural Requirements.
Fund of Funds Objectives and Parameters Worksheet.
Step 2: Screen to Create a Funds of Funds Short List.
HFRI Fund of Funds Conservative Index.
HFRI Fund of Funds Strategic Index.
HFRI Fund of Funds Diversified Index.
HFRI Fund of Funds Market Defensive Index.
Summary.

8 Issues in Due Diligence: The Fund of Funds Firm Background Information.
Staff Information.
Company Structure.
Asset Management Activities.
Product Information.
Performance.
Summary. 

9 Issues in Due Diligence: Portfolio Management Asset Allocation/Style Selection.
Due Diligence Criteria in Manager Selection.
Portfolio Construction.
Summary. 

10 Issues in Due Diligence: Risk Management Transparency and Separately Managed Accounts.
Transparency.
Managed Account Structures.
Pricing Risk Case Study: Lipper.
Style Drift Case Study: Integral.
Risk Management.
Compliance and Legal Issues.
Summary.

11 Fund of Funds Selection Case Study.
Scenario.
Step 1: Defining Investment Objectives and Parameters.
Step 2: Screening to Create the Funds of Funds Short Lis.t
Step 3: Conducting a Due Diligence Screen of the Funds of Funds Short List.
Step 4: Evaluating Finalists for Selection.
Final Selections.
Summary. 

Appendix A: AIMA Due Diligence Questionnaire. 
Appendix B: Excerpts from HFR Fund of Funds Industry Report.

Index.
"While hedge fund of funds have proliferated as a relatively new investment vehicle, reliable information about these vehicles has been limited. Joe Nicholas's timely book does a magnificent job of providing concise, valuable information about these popular new funds."
- Dan Rauchle
President, Wells Fargo Alternative Asset Management

"A creative and disciplined work that offers powerful insights into the fast-growing world of fund of funds investing and strategies. A quick and informative read for both the HNW and institutional investor."
- Lawrence Simon
President and CEO, Ivy Asset Management Corporation

"Hedge Fund of Funds Investing provides a thorough, well-articulated discussion of the key characteristics and issues associated with investing in a fund of hedge funds. I believe the frank disclosure of both the advantages and disadvantages of these vehicles, as well as the information on selecting a fund of funds, will make this book required reading for individual and institutional investors alike."
- Frank Belvedere, CFA, FCIA
Vice President of Alternative Investments, Montrusco Bolton, Montreal, Canada

This is a great reference for those who are just beginning to invest in hedge funds, as well as those who already have a hedge fund of funds allocation. If you are new to this investment vehicle, the book provides a thorough description of fund of funds and a great framework for conducting the due diligence process. If you are already invested in fund-of-funds, it will prompt you to ask some probing questions at the next meeting with your fund-of-funds manager."
- Cindy Koury
Senior Managing Director, Victory Capital Management

"Hedge fund expert Joe Nicholas dissects the industry's hottest trend, investing in fund of hedge funds, in his new book. It's a must-read for institutional and private investors alike."
- Joe Hershberger
Managing Director, Putnam Lovell NBF Securities Inc.

"Joe does it again! By taking complex and critical issues in hedge funds, he transforms them into the most accessible and readable form. Read it and reap."                                        - P. Morgan Kash
Senior managing director, Paramount Capital, Inc.
Board Member, Hedge Fund Association

"There has been tremendous growth in the fund of hedge fund business with assets doubling in the last year.  Joe clearly explains the reasons for this growth as he examines the hedge fund industry and assesses fund of hedge funds as the most effective way to gain exposure to the hedge fund arena. The book is a terrific resource for those considering an investment in hedge funds and/or a fund of hedge funds."
- Patricia Young
Managing Director and CIO, NewMarket Capital Partners, LLC

"Joe Nicholas has created an authoritative and innovative handbook of fund of funds investing that is essential for both financial and nonfinancial decision makers.  Building upon his previous writing, he has successfully applied his practical hands-on experience to demystify the hedge fund industry using common sense explanations that do not depend on obscure jargon or understanding."
- Sara Albrecht, CFA
Executive Committee and Trustee,  Museum of Contemporary Art, Chicago
Author
Joseph G. Nicholas
Short Title
HEDGE FUND OF FUNDS INVESTING
Series
Bloomberg Professional Library
Language
English
ISBN-10
1576601242
ISBN-13
9781576601242
Media
Book
Format
Hardcover
DEWEY
332.645
Year
2004
Publication Date
2004-01-31
Subtitle
New Strategies for the Hedge Fund Marketplace
Imprint
Bloomberg Press
Place of Publication
Princeton
Country of Publication
United States
Residence
US
Birth
1959
Audience
General/Trade
Illustrations
black & white illustrations
Edition
1st
Pages
288
Publisher
Bloomberg Press
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