Hedge Fund-Find of Funds Flashcards
Multistrategy fund
deploys its underlying investments with a variety of strategies and sub- managers, much as a corporation would use its divisions.
Operational due diligence
is the process of evaluating the policies, procedures, and internal controls of an asset management organization.
Well-diversified portfolio
is traditionally interpreted as any portfolio containing only trivial amounts of diversifiable risk.
Redemption gates
are a mechanism by which a hedge fund can limit the total amount of capital being redeemed from a fund at any single redemption period (e.g., quarterly).
Double layer of fees in FoFs refers to
the two layers of fees charged to investors, including those at the fund level and at the fund of funds level.
Merger arbitrage attempts to benefit from
merger activity with minimal risk and is perhaps the best-known event-driven strategy.
General partners (GPs)
are fund managers who manage the investment of private equity funds.
Top-down approach analyzes
the macroeconomic conditions surrounding the targeted PE markets and then determines the weights and the combination of industry sectors, countries, fund styles, and so on that are best for meeting the PE program objectives under the likely scenarios.
Top-down asset allocation emphasizes
allocation based on the analysis of the macro environment and risk premiums, and their expected impact on general categories or types of portfolio investments.
Excess kurtosis
provides a more intuitive measure of kurtosis relative to the normal distribution because it has a value of zero in the case of the normal distribution: Excess Kurtosis = {E [(R − μ) 4] ∕σ4} − 3.
Recourse
is the set of rights or means that an entity such as a lender has in order to protect its investment.
Managed futures refers
to the active trading of futures and forward contracts on physical commodities, financial assets, and exchange rates.
Venture capital (VC)
the best known of the private equity categories, is early-stage financing for young firms with high potential growth that do not have a sufficient track record to attract investment capital from traditional sources, like public markets or lending institutions.
Seeding funds,
or seeders, are funds of funds that invest in newly created individual hedge funds, often taking an equity stake in the management companies of the newly minted hedge funds.
Equity kicker
is an option for some type of equity participation in the firm (e.g., options to buy shares of common stock) that is packaged with a debt financing transaction.
Start-up
is a stage when further financing is provided to establish the company and begin to market its new product
Consolidation
is an increase in the proportion of a market represented by a relatively small number of participants (i.e., the industry concentration).
Hedge fund program refers to
the processes and procedures for the construction, monitoring, and maintenance of a portfolio of hedge funds.
Market risk
refers to exposure to directional moves in general market price levels.
Idiosyncratic risk
is a type of investment risk, uncertainties and potential problems that are endemic to an individual asset (like a particular company’s stock), or group of assets (like a particular sector’s stocks), or in some cases, a very specific asset class (like collateralized mortgage obligations). It is also referred to as a specific risk or unsystematic risk.
systematic risk
the opposite of idiosyncratic risk, which is the overall risk that affects all assets, such as fluctuations in the stock market or in interest rates—or the entire financial system.
Funds of funds are
hedge funds with an underlying portfolio of other hedge funds.
The primary purposes of funds of funds are
1) to reduce idiosyncratic risk through diversification,
2) to tap into the potential skill of the fund of funds manager in selecting investments, and in monitoring and managing the portfolio of hedge fund investments.
3) (some funds) to offer access to managers whose funds are closed to new investors.
FoFs share in the HF industry
1/4
FoFs benefits
- outsourcing a DD function to a professional FoFs manager
- selecting from a universe of 7000 HFs with a wide dispersion of returns
- FoFs provide a value-added through manager selection and diversification
* however, returns are subjected to a 2nd layer of fees
The three primary approaches to a diversified hedge fund portfolio are
1) internal management,
2) multistrategy funds,
3) funds of funds.
Internal management
- for investors who can afford staff and large allocations to single fund
- retain control of manager selection decisions
- compare cost to FoFs fees
Four Functions of Fund of Funds Management
- Strategy and manager selection: The FoF manager is responsible for selecting the strategies and the managers that will represent those strategies.
- Portfolio construction: Once the strategies and managers have been selected, the FoF manager has to decide on how much to allocate to each strategy and manager.
3.Risk management and monitoring: The FoF manager will monitor each hedge fund to ensure that its performance profile is consistent with the fund’s overall objectives.
May employ risk management processes or multifactor sensitivity analysis to gauge the risk exposure - Due diligence: For hedge fund investing, due diligence is the process of monitoring and reviewing the management and operations of a hedge fund manager.
FoFs vs multi strategy fund
- both are a diversified fund run by a single hedge fund manager.
- The difference is that a fund of funds allocates its assets amongst other hedge funds and in so doing creates two layers of fees: the fees of the fund of fund’s structure and the fees of the underlying hedge fund investments.
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Operational due diligence is
the process of evaluating the policies, procedures, and internal controls of an asset management organization.
FoFs approach advantage
- diversification by giving an access to the HF universe universe of event- driven, relative value, macro, and equity strategies.
- safety in numbers by reducing idiosyncratic risk exposure through single strategy/manager skills
- professional management of risk and diversification
multi strategy fund
- employ a single fund manager who oversees multiple strategies
- lower fees than FoFs
- advantage in tactical and strategy allocation
- may have an operational risk and less manager choice than FoFs
