Alternative Investments
The International Organization of Securities Commissions (IOSCO) this month issued for public review and comment its Principles for the Valuation of Hedge Fund Portfolios. The purpose of the Principles is to ensure that hedge funds' financial instruments are appropriately valued and that fund investors are not disadvantaged by inaccurate valuations. More...
30/03/07
Real Estate
In mid-2005, the National Council of Real Estate Investment Fiduciaries and Credit Suisse First Boston entered into an exclusive agreement to develop property derivatives in the United States. While only two NCREIF swaps have been reported to date, several new indices have hit the market at the end of 2006 and more are in the wings.
In a two-part article, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre looks at the characteristics of the indices vying to serve as underlyings for the budding US property derivatives markets. Part 1 looks at the appraisal-based NCREIF Index; Part 2 introduces its various transaction-based challengers. More...
21/03/07
Alternative Investments
Will the hedge fund industry imitate the mutual fund industry by following the path of passive investing? This question is at present one of the hottest in the alternative universe, where the ability to replicate hedge funds is being extensively debated. Whatever the term used – clone, synthetic fund or replication index – this new product is presented as a third generation of products in the passive representation of hedge funds, after non-investable indices and investable indices.
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18/03/07
Real Estate
Long present in the books of European institutional investors, real estate began to gain acceptance amongst U.S. investors in the 1970s and investors worldwide are now seeking to increase their allocations to this asset class. Real estate assets are traditionally regarded — and marketed — as real and therefore solid investments that offer attractive risk-adjusted returns, significant portfolio diversification benefits, a high and stable income component and long-term inflation protection. More...
02/03/07
Alternative Investments
On February 22, 2007, the President’s Working Group on Financial Markets (the “Working Group”) issued guidelines for the oversight of hedge funds, private equity funds and other private pools of capital, entitled “AGREEMENT AMONG PWG AND U.S. AGENCY PRINCIPALS ON PRINCIPLES AND GUIDELINES REGARDING PRIVATE POOLS OF CAPITAL”. The Working Group consists of representatives from the Treasury, the Federal Reserve, the Securities and Exchange Commission and the Futures Trading Commission. More...
28/02/07
Alternative Investments
In a reply to the CESR Issues Paper on the eligibility of hedge fund indices for the purpose of UCITS, the EDHEC Risk and Asset Management Research Centre argues that hedge fund indices should not be required to offer more controls and more transparency than existing financial indices such as stock market indices. Likewise, their construction should not be subjected to detailed rules for choosing constituents and implementing rebalancing and weighting mechanisms. More...
23/01/07
Alternative Investments
The Securities and Exchange Commission (the “SEC”) has published the text of its proposed new rules for advisers to hedge funds and private equity funds. First, the SEC are proposing to adopt a new antifraud rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that would clarify, in light of the recent court decision in Goldstein v SEC, 451 F.3d 873 (D.C. Cir. 2006), the ability of the SEC to bring enforcement actions under the Advisers Act against investment advisers who defraud investors or prospective investors in a hedge fund or other pooled investment vehicle. More...
10/01/07
Alternative Investments
On December 13, 2006, the Securities and Exchange Commission (the “Commission”) voted to propose new rules that will provide additional protections to investors in hedge funds and other pooled investment vehicles. The proposals include new antifraud provisions under the Investment Advisers Act of 1940 (the “Advisers Act”) and new marketing provisions under the Securities Act of 1933 (the “Securities Act”). The Commission’s proposals are a reaction to a U.S. Court of Appeals ruling earlier this year overturning their new hedge-fund registration requirements, thereby significantly limiting their authority to monitor such fund’s activities. As a result of this decision, the Commission’s concerns about industry fraud and the potential risk to ordinary investors, voiced over the last three years, were left unaddressed.
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14/12/06
Alternative Investments
François-Serge Lhabitant When investing in hedge funds, the control of risk should be of primary importance, while gaining some return in excess of the risk-free rate should only be a secondary objective. Many investors tend to forget this basic principle, and therefore end up holding alternative portfolios that do not match their risk/return expectations. One should always remember that risk, by itself, is not bad – it normally implies gaining some risk premium. What is bad is a risk that is misunderstood, or even worse, not detected. More...
04/10/06
Alternative Investments
Noël Amenc et al. While there has been a significant amount of research on the predictability of traditional asset classes, and the implications in terms of tactical asset allocation strategies, very little is known about the predictability of returns emanating from alternative vehicles such as hedge funds. Also, and not surprisingly given the absence of academic evidence on the predictability of hedge fund returns, very little is known about the performance of tactical asset allocation strategies involving hedge funds. More...
04/10/06
Alternative Investments
Felix Goltz After tremendous growth over the last decade, the hedge fund industry has clearly entered a more mature stage. From an initial phase, when some high net worth individuals invested in hedge funds, the industry has moved into the mainstream as more and more institutional investors have started allocating to, or at least looking at, hedge funds as a distinct asset class. As these investors consider investing in hedge funds, it is useful to review the benefits they can expect. In addition, a question that directly results from the diversity of the products available is: “How should institutions choose to access hedge funds in order to maximise these benefits?” More...
03/10/06
Alternative Investments
In a little over a week, Amaranth Advisors, a respected, diversified multi-strategy hedge fund, lost 65% of its $9.2 billion assets. In a paper entitled ‘EDHEC Comments on the Amaranth Case: Early Lessons from the Debacle’, noted commodities expert Hilary Till, Research Associate with the EDHEC Risk and Asset Management Research Centre and Principal of Premia Capital Management, LLC, examines how Amaranth could have suffered such massive losses and draws lessons from this debacle for investors, funds of fund & energy fund risk managers, multi-strategy hedge fund managers, policy makers, and the alternative investment industry as a whole. More...
02/10/06
Alternative Investments
Noël Amenc et al. In 2003, the EDHEC Risk and Asset Management Research Centre presented a detailed survey on European Investment Management practices, highlighting major discrepancies between current industry practices and leading academic thought. This article covers the main findings of the survey with regards to the management of risks, describes the importance of the risk management function and discusses the various techniques available to investment managers. More...
29/09/06
Alternative Investments
Mathieu Vaissié Hedge fund strategies have long been regarded as “absolute return strategies”. Investors who suffered as a result of their sub-optimal diversification policy after the bursting of the Internet bubble began to look at alternative investments as a way to improve their protection. In particular, they became interested in the genuine diversification properties of hedge funds and progressively introduced them into their “Core” portfolio. However, capitalising on the diversification potential of hedge funds requires a good understanding of the risk characteristics of hedge fund strategies. More...
26/09/06
Fund Ratings
Noël Amenc The rating of mutual funds has been an area of considerable growth not only in the United States but also in Europe. Increasingly demanding investors now require fund performance measurements that are both relevant and scientifically rigorous. More...
21/09/06
UCITS Eligibility
In a document entitled ‘A Reply to the CESR Recommendations on the Eligibility of Hedge Fund Indices for Investments of UCITS’, Noël Amenc and Felix Goltz of the EDHEC Risk and Asset Management Research Centre have urged the CESR to reconsider their position on suspending the eligibility of hedge fund indices. More...
21/09/06
Alternative Investments
Core and satellite portfolio construction is recognised as an effective strategy for institutions that want to diversify their portfolios without giving up the potential for higher returns generated by selected active management strategies. It also provides the framework for targeting and controlling those areas where investors are willing to take more risk in a cost-efficient manner. More...
18/09/06
Alternative Investments
Mathieu Vaissié For several months, investors and their advisors have been worrying about the profitability prospects for hedge funds, faced with fears that hedge fund alpha is diminishing. The objective of this article is to examine whether the opinions on the capacity effect of the finance professionals in the field, and their views on the real sources of hedge fund performance, are consistent with academic findings. More...
18/09/06
Alternative Investments
Lionel Martellini and Volker Ziemann Recent difficulties have drawn attention to the risk management practices of institutional investors in general and defined benefit pension plans in particular. The fact that institutional investors have been so dramatically affected by market downturns at the beginning of the new millennium has led to major changes in institutional money management, including notably the need for an increased focus on asset-liability management (ALM). More...
15/09/06
Alternative Investments
The advantages offered by hedge funds do not come without a downside. Exposure to alternative risk factors is a source of superior return-risk trade off and is the very essence of hedge funds’ extensive diversification possibilities when compared to traditional investments. However, such exposure usually requires trading activities that can be considered less conventional than in the long only universe. More...
15/09/06
Alternative Investments
There are two main challenges involved in the application of standard asset allocation methods to the design of optimal portfolios that include hedge funds. One is that it is extremely difficult to obtain a forward-looking estimate of a hedge fund’s expected return. The other comes from the fact that in general hedge fund returns are not normally distributed, which makes the use of any asset allocation model based on sole estimates of expected return and volatility somewhat problematic. More...
15/09/06
Alternative Investments
The US Securities and Exchange Commission (SEC or Commission) has continued with its efforts to address the fallout from the decision in the Goldstein Case. The latest action in its ongoing attempts to bring hedge fund advisers under greater scrutiny came in the form of a letter to the American Bar Association setting out the Commission’s views following the vacating of the rule 2003(b)3-2 placing registration obligations on hedge fund managers. More...
31/08/06
Alternative Investments
At the beginning of June, the FRR (Fonds de Réserve pour les Retraites) announced its decision to allocate 10% of its assets to so-called alternative products. The reason highlighted was the risky nature of the current composition of the fund, which is dominated by two asset classes, stocks and bonds. The allocation to alternative products targeted by FRR is part of a diversification logic: by being exposed to different risk factors (i.e. different asset classes) the portfolio’s sensitivity to a given source of risk is reduced. This aims to generate returns that present greater stability over time.
However, the FRR’s decision to allocate 10% of its assets to alternative products is accompanied by a decision to exclude hedge funds from that allocation. More...
27/07/06
Alternative Investments
A US federal appeals court has unanimously held that the Securities and Exchange Commission (SEC) exceeded its authority when it adopted a controversial new rule requiring hedge fund managers to register as investment advisers with the SEC, throwing the SEC’s long-running battle to better regulate hedge funds into doubt and disarray. The shock decision leaves hedge fund managers and their investors in limbo, while they await a definitive response from the SEC on how it intends to regulate this $1.5 trillion industry in the future.
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25/07/06
Alternative Investments
Over the past five years, the number of hedge funds has increased to over 8,000, with assets under management exceeding US$1 trillion. Generally speaking, hedge funds operate with few constraints in order to achieve the absolute return, or “alpha”, that they seek. As the funds themselves are largely unregulated, the investor relies primarily on the directors of the fund to oversee the arrangements entered into with third parties, such as the investment manager. More...
02/05/06
Alternative Investments
U.S. hedge fund managers are being or will be more regulated in the new legal environment, since the era of registration for hedge funds has begun and all registrations will be completed by February 1, 2006. On October 26, 2004 the Securities and Exchange Commission (SEC) voted 3 to 2 to adopt a regulation requiring most U.S. hedge fund managers to register as investment advisers. More...
18/01/06
Alternative Investments
Following its meeting in Sonoma, California on July 10-11, 2005, the Financial Economists Roundtable (FER), an international group of senior financial economists, issued a statement in which it warned about the risks involved in investing in hedge funds. The EDHEC Risk and Asset Management Research Centre, which has carried out a multi-faceted research programme on hedge funds over the past three years, has published a paper by Noël Amenc, PhD, and Mathieu Vaissié in response to the FER statement in which it comments on the FER’s recommendations. More...
18/01/06
Alternative Investments
New Spanish Collective Investment Institutions (CII) regulations were approved by the Ministry of Finance on November 4, 2005. In the realm of alternative investment products, the Spanish market will be among the most modern after adopting these new regulations, in which most matters pertaining to the establishment, governance and transparency of funds, as well as retail investor protection, have been addressed. More...
19/12/05
Alternative Investments
The performance of hedge funds could be decomposed into three distinct components, namely traditional betas, alternative betas, and alpha. As a result of the very nature of their return generating processes, hedge funds can be used to improve the diversification of traditional portfolios (i.e. as part of investors’ core portfolio) or to implement portable alpha strategies (i.e. as part of investors’ satellite portfolio). More...
27/09/05
Alternative Investments
The indexing approach constitutes a sound choice for an investor’s hedge fund portfolio, given that the investor does not want to take on selection risk and is interested in controlling his risk/return profile. Research results show that the investability of a hedge fund index does not necessarily come at the cost of representativeness. However, using strategy indices that are both investable and representative to optimally include hedge funds in the portfolio still requires a fair amount of allocation skill and significant minimum investment. More...
07/09/05
Performance Persistence
Annual fund rankings are published at the end of each year. At first sight, it seems attractive to invest in the top-ranking funds. However, an important question has to be asked beforehand: do winners repeat? This question relates to a primordial aspect of the performance measurement process, namely performance persistence. More...
19/08/05
Alternative Investments
At a time when hedge funds are more widely reported and discussed in the general and financial press than ever before, the Financial Services Authority has recently released two new discussion papers addressing a number of important issues related to their structure and operation. More...
18/07/05
Alternative Investments
Managed accounts have emerged over recent years as a viable alternative to direct hedge fund investing for many investors. They have seen considerable growth for a number of reasons, including: greater demands for transparency; growing use of structured products leading to increased liquidity requirements; and increasing appetite for investable hedge fund indices, which are largely based on managed accounts. More...
27/06/05
Operational Risk
Hedge funds face different risk exposures, not the least important of which is operational risk. Operational risk here refers to the non-financial risk factors which encompass everything from fraud and mis-pricing of positions to common operational issues such as processing errors, technology failure, and poor data. Operational issues have increasingly become an important factor in hedge-fund failures. PWC in their global hedge fund valuation and risk management survey found that managing and mitigating operational risks were at the top of the list of hedge fund risk management priorities. More...
19/05/05
Alternative Investments
Recently, much attention has been given in the financial and industry press to the steady progression of hedge funds into transactions typically reserved to private equity players. This has caused a stir in the markets, both from the point of view of private equity players, as well as their financial advisers, who see the increasing prominence of hedge funds as an opportunity for more deals and greater fees. What are the implications arising from such hedge funds activities? How will established PE funds react? What does the future hold for both sets of alpha-driven money managers? More...
18/05/05
Alternative Investments
The debate on hedge funds’ transparency, though relevant, often fails to emphasise the right issue. One has to bear in mind that transparency is not an objective per se, it is simply a means. Indeed, it is no use seeking absolute transparency. What investors really need is enough information to assess the risk and return profile of an investment opportunity with a reasonable degree of certainty, nothing more. More...
13/05/05
Alternative Investments
As the hedge fund industry continues to move closer to the investment mainstream, most investors still lack the adequate resources required to invest directly into single hedge funds (time, knowledge, capital, etc). They may instead decide to invest through third parties like funds of hedge funds. However, if as is evidenced in academic literature, hedge fund picking is a challenging task, then fund of hedge funds picking, is also particularly tricky.
More...
12/05/05
Hedge Fund Indices
Over the past few years, the hedge fund market has probably constituted the most remarkable growth area in the fund management industry. From an initial stage, when some high net worth individuals invested in hedge funds, the industry has moved into the mainstream as increasing numbers of institutional investors have started allocating to, or at least looking at, hedge funds as a distinct asset class. More recently, investable hedge fund indices have appeared, trying to build on the passive investing argument that a lot of institutional investors are familiar and comfortable with from their equity portfolios. However, a sometimes confusing debate on the usefulness of indices has emerged, with some stating that indices contradict the very nature of the investment strategies followed by hedge funds. More...
12/05/05
Alternative Investments
The potential for conflicts of interest on the part of hedge fund managers is integrally linked to their provision of discretionary investment management services. Where a hedge fund manager has a number of other hedge funds actively investing, or is part of a larger financial conglomerate, investors will demand to understand very clearly how potential conflicts will be resolved. This will require, among other things, precise drafting in contracts and prospectuses with regard to investment objectives and restrictions. More...
13/04/05
Alternative Investments
On November 9, the AMF officially announced the final specificities of the new single manager's onshore vehicles called ARIA ("OPCVM Agréés à Règles d’Investissement Allégées", or funds with lighter procedures). The final regulations on hedge funds will be approved by the finance minister most probably towards the end of November. The regulatory body expects to approve the first French single manager fund by the end of December 2004. More...
10/11/04
Alternative Investments
The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment association, and the Dublin Funds Industry Association (DFIA), the representative body for the international investment community in Ireland, have launched an initiative to educate administrators in the hedge fund industry and highlight the differences with the administration of mutual funds. More...
13/09/04
Alternative Investments
In the wake of the recent publicity on regulating hedge funds, regulators have widened the scope and stepped up policing of how brokerage firms market and service hedge funds.
In April, the Securities and Exchange Commission sent a lengthy questionnaire to many big Wall Street firms seeking extensive information about potential conflicts of interest involving hedge funds. Since then, officials from some of the firms have met with the agency to discuss its questions. More...
27/07/04
Alternative Investments
According to a recent survey jointly released by Watson Wyatt and Global Investor magazine, assets under management for funds of hedge funds increased by 30% in 2003.
The survey, the Alternatives 99 ranking, which brings together the world’s 99 largest alternative players in funds of hedge funds, private equity funds of funds, and the property and commodities arena, also reveals growing interest by institutional players in the alternatives space. More...
12/07/04
Alternative Investments
“Too much regulation kills regulation” seems to be the general industry sentiment in response to the recent buzz on hedge fund regulations. Industry veterans think that greater regulation of hedge funds could limit their growing role as major providers of stability and liquidity in times of turmoil. To them, the increasingly competitive hedge fund industry is already cleaning up its act to attract institutional investors, who are known to be risk averse and perhaps even conservative in their investment directives. More...
09/07/04
Alternative Investments
To many investors, investing in hedge funds is not unlike joining an established English club. Exclusive, sophisticated and discreet, admission by recommendation only, the old boys' club is hardly awed by new money or fads. The current hype surrounding investing in hedge funds has probably heightened the curiosity to sneak into its cool plush interior to get an idea of what is happening behind the closed doors. Funds of hedge funds (FoHF) seem to have provided logical access to this old boys' club.
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11/06/04
Alternative Investments
In a series of articles, we are examining the regulatory framework for alternative investment in various countries, with the focus in this article on France. More...
04/02/04
Business Analysis
A report issued by UBS Warburg Global Equity Research foresees a change in focus of the industry from managing assets to controlling risk. Simple seizure of risk premiums through buy-and-hold positions in assets is a business model that could be seriously challenged by portfolios using more sophisticated risk management techniques. More...
25/06/03
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