François-Serge Lhabitant

Assessing Market Risk for Hedge Funds and Hedge Funds Portfolios

We suggest an empirical model to analyze the investment style of individual hedge funds and funds of funds. Our approach is based on a mixture of the style analysis approach suggested by Sharpe (1988), the factor push approach used in stress testing, and historical simulation. An interesting and straightforward extension of this model is the estimation of value-at-risk (VaR) figures. This extension is tested using a very intuitive implementation over a large sample of 2,934 hedge funds over the 1994-2000 period. Both the in-the-sample and the out-of-sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.

Hedge Fund Diversification

There are many benefits to investing in hedge funds, particularly when using a diversified multi-strategy approach. Over recent years, multi-strategy funds of hedge funds have flourished and are now the favorite investment vehicle of institutional investors exploring the world of alternative investments. More recently, funds of hedge funds that specialize within an investment style have also emerged. The authors study the impact of diversification on naively constructed (randomly chosen and equally weighted) hedge fund portfolios. They provide insight into style diversification benefits as well as the inter-temporal evolution of diversification effects on hedge funds.

On Swiss timing and selectivity: In the quest of alpha

This paper presents an overview of the theories underlying the major portfolio performance measurement models, with an empirical application to assess the market timing and stock-picking abilities of an exhaustive sample of 60 Swiss-equity investment funds over the 1977-1999 period. Regardless of the benchmark portfolio or the performance measurement model, we find no evidence that Swiss-equity mutual funds, either individually or as a whole, provide investors with superior stock selection or market timing relative to a passively managed benchmark portfolio. We also found a negative correlation between selectivity and timing results. Finally, the influence of asset size, funds age and management fees are considered as an explanation of the results.

Doing business in emerging Europe

Belarus Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovak Republic Slovenia Ukraine Overview of Bosnia-Herzegovina, Croatia, Cyprus, Macedonia & Serbia/Yugoslavia

Doing Business in Ukraine

Although it is the second largest country in Europe, Ukraine is still at an early stage in its transition to a market economy. Given its strong long-term potential, it is a key country to monitor on the changing global landscape. This article provides a comprehensive review of Ukraines historical development, political structure, economy, investment and foreign trade environment. It aims at being a useful source of information for foreign businessmen and investors interested in doing business in Ukraine.

High-Frequency Trading: Past, Present, and Future

Abstract In this chapter, we explore the history and development of high-frequency trading to its current stance of prominence in todays financial markets. We review the major types of high-frequency trading strategies in use, discuss their possible benefits and potential harms, and examine some of the regulatory responses seen so far.In this chapter, we explore the history and development of high-frequency trading to its current stance of prominence in todays financial markets. We review the major types of high-frequency trading strategies in use, discuss their possible benefits and potential harms, and examine some of the regulatory responses seen so far.

Hedge Fund Indices for Retail Investors: UCITS Eligible or Not Eligible?

European regulators are now officially focusing on whether hedge fund indices should be eligible assets for UCITS III funds, that is, funds open to retail investors. In this paper, we review hedge fund indices and the various steps of their construction. We show that they suffer from several biases and are not representative of the hedge fund universe. Many of them are, in essence, funds of hedge funds managed according to arbitrary rules and just designed to support high-fee tracking products. We therefore suggest excluding them from the list of UCITS III eligible assets.

Is Greed Still Good? What Have HedgeFund Managers and Investors Learnedfrom the 2008 Crisis?

Have investors and hedge fund managers learned anything from their recent mistakes? One can doubt it. While each financial crisis has its unique features, common traits and warning signals surface repeatedly. In this article, the authors have chosen to discuss six of them, namely (a) the belief that the current situation bears little similarity to past disasters; (b) the misalignment of interests between principals and agents; (c) the mismatch of liquidity between assets and liabilities; (d) the increased use of leverage when returns are disappointing; (e) the increased complexity of the strategies and instruments traded; and (f) the lack of reliability of external due diligence providers. They conclude that, unfortunately, many of these signs seem to be back again in the world of hedge funds.

Funds of funds of hedge funds: Welcome to diworsification

Publisher Summary Hedge funds are often thought of as being high-risk investments, and many investors in the past have shied away from them for fear of incurring large losses. However, inrecent years, hedge funds have generally substantially outperformed equities, with much lower volatility. As a consequence, they are now in strong demand, particularly when one remembers that any risk associated with hedge fund investing diminishes in importance when the funds are repackaged into fund of funds products. The proliferation of hedge funds, the increasing participation of investors in alternative investments, the growing collection of articles analyzing hedge funds, and the omnipresent uncertainty of future market conditions all give rise to a greater need to choose the right hedge funds when allocating to alternative assets. However, once one admits that portfolio diversification reduces manager risk, there is a fundamental issue that needs to be addressed: the optimal number of funds of hedge funds to effectively benefit from diversification. Using the Altvest database, we provide evidence that from a pure market risk perspective, existing funds of hedge funds are sufficiently well diversified. Consequently, mixing them in a portfolio does not result in significant diversification benefits, but adds an extra layer of fees that is harming investors. Portfolios with large numbers of funds of hedge funds end up mimicking the performance of a passive investment in a broad hedge fund index while also incurring excessive management fees.

Financial Constraints and Investment: the Swiss Case

We study the empirical link that exists between investment-cash flow sensitivities and financial constraints in the Swiss financial market. We follow the standard approach introduced by FAZARRI, HUBBARD and PETERSON (1988), but improve it by using a dynamic classification of firms, a new estimation procedure, while paying particular attention to information asymmetry indicators. We observe that investment-cash flow sensitivities are homogeneous among firms during boom periods, as in KAPLAN and ZINGALES (1995), but heterogeneous during recession periods. The link between investment-cash flow sensitivities and the intensity of financing constraints is monotonically increasing, as in FAZARRI, HUBBARD and PETERSON (1988).