Thomas Heidorn

The Risk of Funds of Hedge Funds: An Empirical Analysis of the Maximum Drawdown

Funds of hedge funds (FHF) are perceived to be the premier choice for institutional investors looking to enter the alternative investment asset class. This article empirically investigates the maximum drawdowns of FHF. It analyzes the time series and descriptive variables of 649 FHFs from the Lipper TASS Hedge Fund database for January 1996 through August 2007. The empirical results suggest 1) the number and the magnitude of drawdowns decreases as the experience of the FHF increases, 2) the average recovery time is higher for older FHFs, 3) there is no difference between small and large FHFs in regards to the magnitude of a maximum drawdown, 4) the higher a maximum drawdown of a FHF, the longer it takes to recover, and 5) most maximum drawdowns occur during times of financial market turmoil. Thus, our findings question especially the acclaimed ability of FHFs to deliver absolute returns. We also show that the beta risks involved with FHFs are high. We find that the advantages of FHFs are more likely to be in their low long-term correlations with traditional asset classes, as well as in their low volatility.

The value-added of investable hedge fund indices

This article empirically investigates the risk and performance of three types of alternative beta products over the January 2002 to September 2009 time period: funds of hedge funds (FHFs), investable hedge fund indices (IHFIs), and hedge fund replication strategies (HFRS). The authors show that IHFIs are true alternative beta products with high correlations and beta to non-investable hedge fund indices. Their results further suggest that, in a best case scenario, IHFIs outperform FHFs and HFRS on a risk-adjusted basis. However, in the worst case scenario, IHFIs underperform both investments. If one takes the average of all IHFIs, one finds that they perform equally as well as FHFs. Hence, IHFIs constitute a solid alternative to FHF investments, while costing substantially less, and offering generally more transparency and liquidity. The authors propose that fee-sensitive investors especially should consider taking a core-satellite approach to their hedge fund portfolio, with the core represented by cheap passive hedge fund beta through IHFIs, and the satellite represented by more expensive and actively managed alpha-generating FHFs.

A quantitative liquidity model for banks

liquidity concepts liquidity strategies of banks modelling framework cash flow model liquidity transfer pricing liquidity optimization

Characteristics and development of corporate and sovereign CDS

Purpose - – This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years. Design/methodology/approach - – The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market. Findings - – The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS. Originality/value - – Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.

A Comparison of the European and U.S. Funds of Hedge Funds Industries

This article empirically investigates regional differences in the performance of funds of hedge funds (FHFs). It uses descriptive variables and time series for 533 FHFs from the Lipper TASS Hedge Fund Database and segregates them into regional peer groups. The article shows that fees are generally higher in Europe than in the U.S., that redemption periods are longer in the U.S. than in Europe, and that assets under management tend to be higher in Europe. Additionally, we find that European-based FHFs exhibit a stronger home bias than their U.S. counterparts and that U.S.-based FHFs appear to invest more heavily in emerging hedge fund managers.

Distance to Compliance Portfolios: An Integrated Shortfall Measure for Basel III

We develop a metric to measure how far banks are away from regulatory compliance under Basel III. Basel III consists of multiple constraints. Our measure is a portfolio that simultanously covers all constraints and their interdependencies. We apply our measure to a sample of European banks and measure how much additional capital, liquid assets and stable funding are needed for compliance. Our methodology can be generalised to measure the distance to any set of linear constraints that organisations have to (regulatory) or want to (internal) comply with. Furthermore, it is a possibility to provide Basel III - impact studies a sound microeconommic basis missing so far.

Kreditderivate und Kreditportfolien

In den letzten Jahren hat eine intensive Entwicklung von Kreditderivaten begonnen. Im Kern soll hiermit die Moglichkeit geschaffen werden, das Adressenrisiko einer Transaktion von ihrem Marktrisiko zu separieren und es damit einzeln handelbar, aber insbesondere auch hedgebar zu machen.

The value added of hedge fund styles in multi-asset portfolios: A new approach based on bull and bear market betas

Purpose - Academic research has shown that diversification today may not only include stocks and bonds but also alternative investments like hedge funds. However, practical and effective methods to identify the hedge fund styles that really enhance the risk return characteristics of a traditional portfolio as well as optimal allocation sizes are not available. The aim of the paper is to try to close this gap by proposing a portfolio optimization approach based upon the traditional market exposures of the different hedge fund strategies. Design/methodology/approach - For this purpose, the paper first measures the bull and bear market betas of the main hedge fund strategies (equity market neutral, event driven, global macro, relative value, and managed futures). Based on the strategy characteristics, the authors then develop a systematic framework that calculates what percentage of each basic asset should be substituted for by hedge fund strategies to achieve the maximum results. The paper uses hedge fund index data from Hedge Fund Research and Barclay Hedge for the January 1999-April 2011 sample period. Findings - The empirical results show that this approach leads to an improvement in the annualized return of the optimized portfolio. Originality/value - The paper adds to the existing literature by showing that it is possible to substitute traditional assets with hedge fund indices based on their exposures (beta) in varying market environments as a way to optimize the overall portfolio.

Grundlagen der Aktienanalyse

Eine Kernfrage der Kapitalmarkttheorie ist der Zusammenhang von Risiko und Rendite. In diesem Abschnitt werden die grundlegenden Ideen der Aktienbewertung diskutiert.