Guide to Hedge Funds: What They Are, What They Do, Their Risks, Their Advantages (The Economist) - Hardcover

Coggan, Philip

Hardcover

ISBN 10: 0470926554 ISBN 13: 9780470926550

Verlag: John Wiley & Sons Inc, 2010

Inhaltsangabe

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

Über diesen Titel

Über die Autorinnen und Autoren

Philip Coggan writes the Buttonwood column for The Economist, where he is also capital markets editor. Previously, he worked at the Financial Times for 20 years, latterly as investment editor. He is also the author of The Money Machine and How the City Works (Penguin) and Easy Money (Profile Books).

Philip Coggan writes the Buttonwood column for The Economist, where he is also capital markets editor. Previously, he worked at the Financial Times for 20 years, latterly as investment editor. He is also the author of The Money Machine and How the City Works (Penguin) and Easy Money (Profile Books).

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In 1990 hedge funds managed assets worth around $39 billion. At the peak in 2007 that figure had grown to a staggering $2 trillion. Equally staggering is the amount of money successful hedge fund managers earn?in 2008 the top 10 earned more than $10 billion between them. The returns hedge funds make can be substantial, as they should be, given the high fees they charge. But the losses can be substantial too?as some discovered during the credit crunch market upheaval that started in the summer of 2007.

Most people have heard of hedge funds but few are clear about what they are or what they do. The revised and updated second edition of this highly acclaimed guide deftly explains all you need to know about hedge funds in order to understand the nature of their business. Following an introduction there are six chapters:

• Hedge fund taxonomy

• The players

• Funds-of-funds

• Hedge fund regulation

• Hedge funds: for and against

• The future of hedge funds

And at the end of the book there is a glossary of terms used in association with hedge funds, together with a number of tables and charts showing hedge fund data over the years.

Aus dem Klappentext

In 1990 hedge funds managed assets worth around $39 billion. At the peak in 2007 that figure had grown to a staggering $2 trillion. Equally staggering is the amount of money successful hedge fund managers earn?in 2008 the top 10 earned more than $10 billion between them. The returns hedge funds make can be substantial, as they should be, given the high fees they charge. But the losses can be substantial too?as some discovered during the credit crunch market upheaval that started in the summer of 2007.

Most people have heard of hedge funds but few are clear about what they are or what they do. The revised and updated second edition of this highly acclaimed guide deftly explains all you need to know about hedge funds in order to understand the nature of their business. Following an introduction there are six chapters:

• Hedge fund taxonomy

• The players

• Funds-of-funds

• Hedge fund regulation

• Hedge funds: for and against

• The future of hedge funds

And at the end of the book there is a glossary of terms used in association with hedge funds, together with a number of tables and charts showing hedge fund data over the years.

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Guide to Hedge Funds

What They Are, What They Do, Their Risks, Their AdvantagesBy Philip Coggan

John Wiley & Sons

Copyright © 2010 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-0-470-92655-0

Chapter One

Hedge fund taxonomy

It is hard to make sweeping statements about hedge funds. Some take extravagant risks; others control risks carefully. Some love to be in the public eye; others would be mortified by a mention in the Wall Street Journal or Financial Times. Some deal in exotic instruments such as credit derivatives; others simply buy and sell shares like an ordinary fund manager.

That is why commentators have to be careful before pronouncing that hedge funds are buying oil, or that hedge funds have lost a bundle in the Japanese stockmarket. For every hedge fund on one side of the trade, there is likely to be another that is betting in the opposite direction. It is at once a source of strength and of weakness for the sector. The strength is that a market fall is highly unlikely to ruin all hedge funds. In August 2007, when everyone was concerned about a financial crisis, the average hedge fund lost just 1.3%, according to Hedge Fund Research. But the weakness is that, if hedge funds are on both sides of the table, their activities sound increasingly like a zero sum game – a game for which investors are paying extremely high fees.

The sheer variety of hedge funds means that investors need to be careful about what they are buying. The freewheeling style of George Soros or Julian Robertson (who ran the Tiger funds) is far less common these days. The institutional clients of the industry (pension funds, university endowments and private banks) like funds that do "what it says on the tin".

The result is that the industry is nowadays divided into quite a wide variety of sectors. These divisions are far from hard and fast; index providers who categorise the industry rarely have exactly the same descriptions. Some are pretty cynical about the whole exercise. "Hedge fund strategy descriptions are largely there for marketing purposes," says Steven Drobny of Drobny Global Advisors, an expert on the industry.

Part of the difficulty in defining hedge funds is their sheer complexity. Guy Ingram of consultants Albourne Partners says: "It is like cartographics. You have the problem that you are drawing in only two dimensions." Ingram says there are really three: the exposure of the funds (whether they are net long or short); the style of management, whether they use computer models or human judgment; and the asset class they invest in. Mapped on that basis, it is clear that many strategies sit on the boundary of two or more sectors.

But for this book's purposes, we can roughly divide the industry into four categories:

* The first is the Winslow Jones style of managers, those who play the stockmarket with both long and short positions. * The second can be described as arbitrage players, those seeking to exploit inefficient areas of the financial markets such as convertible bonds. * The third can be dubbed directional, those investors who attempt to exploit trends or inconsistencies in a wide range of markets, using either their own judgment or some kind of computer model. * The fourth is known as event-driven, those who exploit a particular situation, such as a merger or a bankruptcy.

Out of these four broad categories, 1020 subcategories can be created.

Because there is no universal agreement on sector definition, it is hard to be definitive about how large the individual sectors are. What is clear is that the industry is much more diversified than it used to be. As of 1990, Hedge Fund Research reckoned that 71% of assets were in global macro funds; by autumn 2009, the macro sector had just 18% of the total and equity hedges had 32%.

Equity funds

Equity long-short

This is perhaps the fastest-growing hedge fund strategy, probably because of its familiarity to both potential managers and clients. For a manager coming from a long-only background, equity long-short seems a natural first step. It takes advantage of his ability to pick stocks. For investors, the style is closest to the traditional active management they are used to, but with the potential appeal of reducing market risk.

But this does not mean it is easy. Managers can find it difficult to make money out of their short positions (for reasons explained in the short-selling section opposite). If the manager has a high exposure to the market, he starts to look like a traditional long-only fund, with much higher fees. Furthermore, clients may feel they are paying for beta (market exposure) rather than alpha (skill).

However, if the manager reduces his exposure to the market, he will probably find he is lagging the leading indices during bull phases. That may tempt clients to switch away from hedge funds and back towards the long-only category. If hedge fund managers end up chasing the market, they can be caught out by a sudden downturn, especially if they are using leverage; this happened to the earliest generation of managers, many of whom were wiped out by the bear market of the mid-1970s. The SEC found 140 hedge funds operating in 1968, but a Tremont Partners survey in 1984 could discover only 68.

Some managers may try to avoid these problems by having a semi-permanent asset allocation, aiming to be, say, a net 80% long most of the time. Others may want the flexibility to use their market timing skills (although it is far from clear that stock-pickers will also be astute at guessing the overall direction of the market). Despite the potential problems, long-short funds keep being created. "There are an awful lot of long-short funds because there are few barriers to entry," says Simon Ruddick of Albourne Partners.

One obvious reason the long-short sector is home to so many funds is that, like ice-cream, it comes in many flavours. Long-short funds can be geographical, focusing on the American market, Europe as a whole (or as individual countries) and emerging markets. They can also be sectoral, focusing on individual industries such as biotechnology or energy. The managers can be traditional stock-pickers or use computer models.

The sector also intersects with a fast-growing product known as the 130–30 fund. Such funds (named after their long-short proportions) are often not constructed as hedge funds but are a way for institutions to benefit from hedge fund techniques (see Chapter 6).

Market neutral

This could be seen as the purest form of hedge fund investing, relying entirely on the manager's skill. Long and short positions are equally matched so that the direction of the market should have no effect on performance (hence the name of the strategy). This approach is usually based on pairs trading, with the manager finding similar stocks and buying the one he likes and shorting the other – an obvious example would be to go long BP and short Shell.

The trouble with this approach, says Dan Higgins of Fauchier Partners, a fund-of-funds group, is that there are no perfect pairs. Managers can delude themselves into thinking they are taking no thematic risk, but when all the positions are added up you find that they are exposed to dollar risk, commodity risk or some other factor.

Furthermore, it can be rare for the manager to have equal convictions about his long and his short positions. So the client finds that while the manager is making money on his long...

Details zur Ausgabe

• Verlag: John Wiley & Sons Inc
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0470926554
• ISBN 13: 9780470926550
• Einband: Gebundene Ausgabe
• Auflage: 2
• Anzahl der Seiten: 176
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar