1、INVESTMENTS | BODIE, KANE, MARCUS Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 26 Hedge Funds INVESTMENTS | BODIE, KANE, MARCUS 26-2 Hedge Funds vs. Mutual Funds Hedge Fund Transparency: Limited Liability Partnerships that provide only minimal disc
2、losure of strategy and portfolio composition No more than 100 “sophisticated”, wealthy investors Mutual Fund Transparency: Regulations require public disclosure of strategy and portfolio composition Number of investors is not limited INVESTMENTS | BODIE, KANE, MARCUS 26-3 Hedge Funds vs. Mutual Fund
3、s Hedge Fund Investment strategy: Very flexible, funds can act opportunistically and make a wide range of investments Often use shorting, leverage, options Liquidity: Often have lock- up periods, require advance redemption notices Mutual Fund Investment strategy: Predictable, stable strategies, stat
4、ed in prospectus Limited use of shorting, leverage, options Liquidity: Can often move more easily into and out of a mutual fund INVESTMENTS | BODIE, KANE, MARCUS 26-4 Hedge Funds vs. Mutual Funds Hedge Fund Compensation structure: Typically charge a management fee of 1-2% of assets and an incentive
5、fee of 20% of profits Mutual Fund Compensation structure: Fees are usually a fixed percentage of assets, typically 0.5% to 1.5% INVESTMENTS | BODIE, KANE, MARCUS 26-5 Hedge Fund Strategies Directional Bets that one sector or another will outperform other sectors Non-directional Exploit temporary mis
6、alignments in relative valuation across sectors Buy one type of security and sell another Strives to be market neutral INVESTMENTS | BODIE, KANE, MARCUS 26-6 Table 26.1 Hedge Fund Styles INVESTMENTS | BODIE, KANE, MARCUS 26-7 Statistical Arbitrage Uses quantitative systems that seek out many tempora
7、ry and modest misalignments in prices Involves trading in hundreds of securities a day with short holding periods Pairs trading: Pair up similar companies whose returns are highly correlated but where one is priced more aggressively Data mining to uncover systematic pricing patterns INVESTMENTS | BO
8、DIE, KANE, MARCUS 26-8 Portable Alpha 1. Invest wherever you can find alpha. 2. Hedge the systematic risk of the investment to isolate its alpha. 3. Establish exposure to desired market sectors by using passive products such as indexed mutual funds or ETFs. Transfer alpha from the sector where you f
9、ind it to the asset class in which you ultimately establish exposure. INVESTMENTS | BODIE, KANE, MARCUS 26-9 Pure Play Example You manage a $1.2 million portfolio. You believe alpha is 0 and that the market is about to fall. So you establish a pure play on the mispricing. The return on your portfoli
10、o is: () portfoliofMf rrrre INVESTMENTS | BODIE, KANE, MARCUS 26-10 Pure Play Example Suppose beta is 1.2, alpha is 2%, the risk- free rate is 1%, and the S Hedged Position INVESTMENTS | BODIE, KANE, MARCUS 26-14 Style Analysis: Factor Exposure Many hedge funds have directional strategies in which t
11、he fund makes an outright bet. A directional fund will have significant betas on the factors on which it bets. INVESTMENTS | BODIE, KANE, MARCUS 26-15 Style Analysis: Factor Exposure Market-neutral funds have insignificant betas. Dedicated short bias funds exhibit substantial negative betas on the S
12、&P index. Distressed firm funds have significant exposure to credit conditions. Global macro funds show negative exposure to a stronger U.S. dollar. INVESTMENTS | BODIE, KANE, MARCUS 26-16 Liquidity and Hedge Fund Performance Hedge funds tend to hold more illiquid assets than other institutional inv
13、estors. Aragon: Typical alpha may actually be an equilibrium liquidity premium rather than a sign of stock-picking ability. Hasanhodzic and Lo: Hedge fund returns have serial correlation, a sign of liquidity problems. This biases the Sharpe ratios upward. INVESTMENTS | BODIE, KANE, MARCUS 26-17 Figu
14、re 26.2 Hedge Funds with Higher Serial Correlation in Returns INVESTMENTS | BODIE, KANE, MARCUS 26-18 Liquidity and Hedge Fund Performance Sadka: Unexpected declines in market liquidity are an important determinant of average hedge fund returns. Santa effect: Hedge funds report average returns in De
15、cember that are substantially greater than their average returns in other months. The December spike in returns is stronger for lower-liquidity funds, suggesting that illiquid assets are more generously valued in December. INVESTMENTS | BODIE, KANE, MARCUS 26-19 Figure 26.3 Average Hedge Fund Return
16、s as a Function of Liquidity Risk INVESTMENTS | BODIE, KANE, MARCUS 26-20 Hedge Fund Performance and Survivorship Bias Backfill bias: Hedge funds report returns only if they choose to and they may do so only when their prior performance is good. Survivorship bias: Failed funds drop out of the databa
17、se Hedge fund attrition rates are more than double those for mutual funds. INVESTMENTS | BODIE, KANE, MARCUS 26-21 Hedge Fund Performance and Changing Factor Loadings Hedge funds are designed to be opportunistic and may frequently change their risk profiles. If risk is not constant, alphas will be b
18、iased if a standard, linear index model is used. INVESTMENTS | BODIE, KANE, MARCUS 26-22 Figure 26.4 Characteristic Line of a Perfect Market Timer INVESTMENTS | BODIE, KANE, MARCUS 26-23 Figure 26.4 Characteristic Lines of Stock Portfolio with Written Options INVESTMENTS | BODIE, KANE, MARCUS 26-24
19、Conclusions The ability to perfectly time the market give the fund a nonlinear characteristic line, similar to holding a call option. The fund has greater sensitivity to the market when it is rising. Funds that write options have greater sensitivity to the market when it is falling than when it is r
20、ising. Nonlinear characteristic lines suggest many hedge funds are implicit option writers. INVESTMENTS | BODIE, KANE, MARCUS 26-25 Figure 26.6 Monthly return on hedge fund indexes versus return on the S&P 500 INVESTMENTS | BODIE, KANE, MARCUS 26-26 Black Swans and Hedge Fund Performance Nassim Tale
21、b: Many hedge funds rack up fame through strategies that make money most of the time, but expose investors to rare but extreme losses Examples: The October 1987 crash Long Term Capital Management INVESTMENTS | BODIE, KANE, MARCUS 26-27 Fee Structure in Hedge Funds 2% of assets plus an incentive fee
22、equal to 20% of investment profits: Incentive fees are effectively call options on the portfolio with: X =(portfolio value)* (1 + benchmark return) The manager gets the fee if the portfolio value rises sufficiently, but loses nothing if it falls. INVESTMENTS | BODIE, KANE, MARCUS 26-28 Figure 26.7 I
23、ncentive Fees as a Call Option INVESTMENTS | BODIE, KANE, MARCUS 26-29 Fee Structure in Hedge Funds High water mark: The fee structure can give incentives to shut down a poorly performing fund. If a fund experiences losses, it may not be able to charge an incentive unless it recovers to its previous
24、 higher value. With deep losses, this may be too difficult so the fund closes. INVESTMENTS | BODIE, KANE, MARCUS 26-30 Funds of Funds Funds that invest in one or more other hedge funds. Also called “feeder funds”. A way to diversify across many hedge funds. Supposed to provide due diligence in scree
25、ning funds for investment worthiness. Madoff scandal showed that these advantages are not always realized in practice. INVESTMENTS | BODIE, KANE, MARCUS 26-31 Funds of Funds Optionality can have a big impact on expected fees. Fund of funds pays an incentive fee to each underlying fund that outperfor
26、ms its benchmark even if the aggregate performance is poor. Diversification can actually hurt the investor in this case. INVESTMENTS | BODIE, KANE, MARCUS 26-32 Funds of Funds Spread risk across several different funds Investors need to be aware that these funds of funds operate with considerable le
27、verage. If the various hedge funds in which these funds of funds invest have similar investment styles, diversification may illusory. INVESTMENTS | BODIE, KANE, MARCUS 26-33 Example 26.6 Incentive Fees in Funds of Funds A fund of funds has $1 million invested in three hedge funds Hurdle rate for the
28、 incentive fee is a zero return Each fund charges an incentive fee of 20% The aggregate portfolio of the fund of funds is -5% Still pays incentive fees of $.12 for every $3 invested Fund 1Fund 2Fund 3Fund of Funds Start of year (millions) $1.00$1.00$1.00$3.00 End of year (millions) $1.20$1.40$0.25$2.85 Gross rate of return 20%40%-75%-5% Incentive fee (millions) $0.04$0.08$0.00$0.12 End of year, net of fee $1.16$1.32$.25$2.73 Net rate of return 16%32%-75%-9%
