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InstitutionalFinanceInstitutionalFinanceLecture06:PortfolioEvaluationandHedgeFunds
MarkusK.Brunnermeier
Preceptor: DongBeom Choi
PrincetonUniversity1
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APrimeronHedgeFunds History,Compensation
o HedgeFungandHsieh,1999,APrimeronHedgeFunds,Journalof
Empirical
Finance.
HedgeFundStrategieso CSFBTremonthttp://www.hedgeindex.com;
, , ,InvestmentManagement
o MalkielandSaha,2005,HedgeFunds:RiskandReturn,FinancialAnalystsJournal
Performance alphaversusbeta
o staleprices
o nonlinearpayoffs
FocusI:MergerArbitrageo MitchellandPulvino,2001,CharacteristicsofRiskandReturninRiskArbitrage,JofFinance
Fundflows
LiquiditySpiralsandLeverage
CorrelationacrossHedgeFunds
2
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HouseholdsHouseholds
Nonfinancial
firmsPensionfunds
Government Restofworld
Direct lending
3
,Corporate bonds
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Households
Financial
intermediaries
qu ty
Indirect
lending
Households
PensionfundsHFs
.
Debt
DepositsFinancial
MortgagesCorporateCredit
Nonfinancial
firms
Restofworld
Direct lending
paper,MBS, ABS
Government
44
,Corporate bonds
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Originateanddistributebankingmodel
Special
purpose
vehicles
(SIVs
etc.)
5
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6Source: Shin
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80%
90%
DP)
80%
fGDP)
Commercial Banks
Mutual Funds + Hedge
Funds + Broker/Dealers
50%
60%
70%
Ass
ets(%o
f
60%
ssets(as%o
Mutual Funds
20%
30%
40%
TotalFinancial
20%
40%
talFinancial
Security Brokers and Dealers
Hedge Funds
0%
10%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
0%
T
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privateinvestmentvehiclesforindividualsorinstitutionalinvestors.
,
and
the
managers
are
general
partners. Asgeneralpartners,thefundmanagersusuallyinvestinasignificantportionoftheir
personalwealthintothepartnershiptoensurethealignmentofeconomicinterests.
Investorstothepartnershiparechargedaperformancebasedfee wherethepotentialpayouttosuccessfulmanagerscanbesignificantlyhigherthanthefixedmanagement
fee.
duetodifferencesintheirtradingstrategies.
Hedgefundsdeploydynamictradingstrategieswhereasmostmutualfundsemployastaticbuyandholdstrategy.
useofshortsales.
Incontrast,theuseofleverageisoftenlimitedifnotrestrictedformutualfunds.
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FirsthedgefundbyAlbertWislow Jonesin1949. pr marystrategyuse ongs ortequ typos t onsan everage.
incentivefeebasedonperformance.
Until1966hedgefundsremainedrelativelyobscure
n ar c e n or une escr e ones un s o avere urns ne o fee)substantiallyhigherthanthebestperformingmutualfunds.
Rapidexpansionin196768 ,
fundssufferedlossesandcapitalwithdrawals.
Hedgefundsfadedbackintoobscurityuntil1986,whenanarticleinInstitutionalInvestorre ortedthatJulianRobertson'sTi erFundhad
compoundedannualreturnsof43%duringitsfirstsixyearsofexistence,afterexpensesandincentivefee.Thisreignitedinterestsinhedgefunds,withtheformationofmanynewhedgefunds.
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Managerscanreceivecertaintypesofperformancebasedfeesthatarepro e omu ua un s.
Thetypicalcompensationforhedgefundmanagersisa 2%managementfeeand
per ormance eew g wa ermar .
substantiallyhighercomparedtomutualfunds.
Mutualfundperformancebasedfeemustsatisfythe"fulcrum"rule:o
relativetoabenchmarkmustresultinthesameamountofpositiveandnegativeincentivefeesforamutualfundmanager
HFarenotsubjecttofulcrumruleandmanagerstypicallyreceive
Embeddedputoptionishighlydebatedo Ontheonehand,thesignificantamountofpersonalwealththathedgefund
managersplaceatriskalongsideinvestorsinhibitsexcessiverisktaking.
o nt eot er an ,t ereareextremec rcumstancesw eret e sproport onapayoutfromtheincentivefeemayoutweightheriskoflosingpersonalwealth
evenifreputationalrisksaretakenintoaccount.10
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Problemconfrontingamoneymanagerwho
e eves a e assuper or nves men s s
limitedowncapital Financingoptions
Equity
Debt puttinguppersonalassetsascollateral inmostcasesinsufficient
Disclosure
Fund
managers
adverse
to
fully
disclose
his
"winning
strategy"
Excludes or anizational forms that must meet a hi h level of "trans arenc " and "disclosure
Favors"privatevehicles" explainsthelackof"publiclyoffered"hedgefundproducts
Investorsdemandlimitedliabilityandprotection
disclosuredocumentsareatbestcursoryandcomplex
recommen a ons romare a esource ,managers repu a on p usper ormances a s csan
computersimulations.
Commitmentofmanagerspersonalcapitalandtheincentivefeestructureareoftencritical
elements.
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SecuritiesExchangeCommission(SEC)overseespubliclytradedsecurities,includingecorpora ons a ssue em, ro er ea ers, nves men a v sorsan mu ua
funds Enforcesfederalsecuritieslawsdesignedtoprotectinvestorsandensuredisclosure
Regulatesfirmsthatpurchaseorsaleofsecurities,provideinvestmentadvice,andinvestment.
SecuritiesActof1933o requiresfirmsissuingpubliclytradedsecuritiestoregisterandfiledisclosurereports.
o ExemptionforHF:ClaimstatusofaprivateplacementunderthesafeharborprovisionofRule506inRegulationD
SecuritiesExchangeActof1934o Regulatesecuritiesbrokerdealers thatfacepotentialconflictsinexecutingcustomerordersversusownaccounts.
o ExemptionforHF:aslongastheytradeonlyforownaccounts.
InvestmentAdvisersActof1940o requiresinvestmentadvisorstoregisterandtoconformtostatutorystandards.
o ExemptionforHF: havelessthan15clients,dontsolicitbusinessfromthegeneralpublic
InvestmentCompany
Act
of
1940
o severelyrestrictsamutualfund'sabilitytoleverage
o ExemptionforHF:Havenomorethan99investors(recently499and
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TheCommodityFuturesTradingCommission(CFTC)overseesfutures
CommodityExchangeActof1974 toregulatethefuturesmarketsinthe,
manipulation,abusivetradepracticesandfraud inthefuturesmarkets.
o Entitiesthathandlecustomerfunds
orprovidetrading
advice infutures
,industryselfregulatorybodyapprovedbytheCFTC.Inaddition,theseregistrantsmustdisclosemarketrisksandpastperformanceinformationtoprospectivecustomers.
investors,itisgenerallyrequiredtofileasacommoditypooloperatorwiththeCommodityFuturesTradingCommission.
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Hedgefundsarenotexemptedfromgeneralregulationsdesignedtomonitorand.
TheU.S.Treasuryrequirestraderstoreportlargepositionsinselectedforeigncurrenciesandtreasurysecurities.
TheSEC requirestraderstoreportpositions thatexceed5%ofthesharesofapubliclytradedfirm
QuarterlypositionforlargeHFs(13Ffiling)
TheFederalReservehasmarginrequirementsforstockpurchases(Reg T)
TheCFTC requirestraderswithlargefuturespositionstofiledailyreports.
TheCFTCandthefuturesexchangessetfuturesmarginsandpositionlimitsonfuturescontracts.
Theseregulationsapplytoallmarketparticipants,includinghedgefunds.
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Credit SuisseTremont
asset
weighted
hedge
fund
indexo calculatedandrebalanced
monthly
o Netoffeeandexpenses
includesonlyfunds,asoppose osepara eaccounts
4500funds
o m n mumo m onundermanagement
o 12monthtrackrecord
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convertiblesecurities
hedgetheequitycomponentbyshortingthe
Also,interestrate,volatility
andcredithedges Hedgeratiosadjustedas
marketsmove
typ ca y es gne tocreateprofitirrespectiveofmarketmoves.
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Priceofconvertiblebonds
nves men va ue= epr ce wereas ra g on
Conversionvalue=valueifconvertedintoitsequityequivalent(e.g.convertedinto5sharesofstockwithprice$10,then$50)
(usually,priceofbond>max{investmentvalue,conversionvalue})
Optionvalue(timevalue)
Convertiblearbitrage
shortpositioninthestock :
multiplyingbyoptiondelta.
Example:
o Convert'spriceis$1000,currentstockpriceis$50,conversionpremiumis50%,
sovalueofthestockpriceconversionpremiumis$75.Optiondeltais0.65.o Numberofsharestoshort,hedgeratio,isthen:($1000/$75)*0.65=8.6667.
o Forsmallstockpricemovementsthisshortpositionprovideshedge.
o
o Duringvolatilemarketsthishedgebreaksdown,butcanbeprofitable
o Cashinthecouponpayments18
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portfoliosoflongandshortequities
focusoncompanieswith
weakcashflowgenerationiscommon.
Riskmanagement
consistsofoffsettinglongpositionsandstoploss
.
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investmentsincurrencies,e tinstruments,equities
andotherinstrumentsof"emerging"markets
byGDPpercapita).
Latin
America,
Eastern
, ,o BRIC
o Next11
,arbitrage,creditandeventdriven,fixedincomebias,ande uit bias.
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ex loitin ricin relationshipsbetweendifferentequitiesor
typicallyhedgingexposure
tooverallequitymarket Subsectors
o Statisticalarbitrage
o Fundamentallong/short
o Indexarbitrage
Leverageiscommon
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Subsectors
o Risk(Merger)ArbitrageSpecialistsare
typicallylongthestockofthecompanybeingacquiredandshortthestockof
theacquirer.
o Distressed/HighYieldSecuritiesFund
managersinvestinclaimsofcompanies
infinancialdistressoralreadyin
default.The tradeatsubstantial
discounts,sincetheyaredifficultto
evaluateandhavealackofstreet
coverage.
.
capitalizationpubliccompaniesthat
areraisingmoneyinprivatecapital
markets.
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Differentfixedincome
securities Yieldcurvecarrytrade
Instruments
o
interest
rate
swapso on s
o futures
o voltradin involvin
options
o mortgagebacked
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FXcarr trades
Fixedincome,currency,equity,commodity(indices)
Focusonshiftsinworld,
changesorglobalsupply/demand
imbalances Focusonliquid
ns rumen s
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o Stockso Futures/options
Shiftfrom
o valuetogrowth,
o smalltolarge
o netlongtonetshort
Focuso Global,regional,or
sec or a
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Investmentinlistedbonds,currency,equ tyan
commodityfuturesmarketsglobally
e erre oas ommo yTradingAdvisors(CTA)
Relyontradingprograms
o Longtermtrendfollowing
o Shorttermcountertrend
o
systematic/discretionaryprograms
o Usestoplosspointstocontrolr s
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strategies startedasconvertible
arbs anddiversifiedin
otherstrategies) Oftenhighlyleveraged
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Sharpe Mean Std Dev Skew Kurt Min 5% Obs Dec-06
Long/Short Equity 0.22 0.63 2.83 0.12 6.89 -11.85 -3.52 171 29%
Event Driven 0.36 0.58 1.61 -3.16 24.84 -12.19 -1.83 171 24%
Global Macro 0.27 0.82 3.00 -0.06 6.20 -11.89 -3.58 171 11%
Multi-Strategy 0.33 0.42 1.26 -1.13 5.65 -5.10 -2.00 171 10%
Emerging Markets 0.12 0.53 4.48 -0.74 8.00 -23.45 -7.31 171 7%
Fixed Income Arbitrage 0.11 0.13 1.16 -3.14 18.19 -7.30 -1.88 171 6%E uit Market Neutral 0.59 0.46 0.79 0.18 3.66 -1.59 -0.80 171 5%
Managed Futures 0.09 0.30 3.46 0.01 3.11 -9.80 -5.24 171 5%
Convertible Arbitrage 0.23 0.32 1.39 -1.58 7.22 -6.04 -1.86 171 3%
Dedicated Short Bias -0.06 -0.31 4.83 0.80 4.89 -9.13 -7.48 171 1%
Sharpe Mean Std Dev Skew Kurt Min 5% Obs
Hedge Fund Index 0.25 0.54 2.15 0.00 5.40 -7.97 -2.61 171
Investment Banks 0.02 0.13 5.29 -0.27 3.25 -16.63 -9.31 168
Commercial Banks 0.15 0.78 5.20 -0.60 5.66 -24.45 -7.46 168
ane : nanc a ns u on n ces
Insurance Companies 0.16 0.76 4.64 0.10 6.49 -16.23 -6.30 168
Market 0.13 0.56 4.17 -0.74 3.97 -16.20 -6.44 172
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AverageHedgefundIndexreturn iscomparabletoS&P500.
,(abouthalf). primarilyduetothesharpdeclineoftheS&P500in2000and2001:
hedgefundshave,onaverage,beenabletounloadthemarketriskpriortotheec ne,seee.g.Brunnerme eran Nage 4
Consequently,theSharperatioforhedgefundsishigherthantheSharperatiofortheS&P500.
Correlation of hed e fund index with market is low 49 Varieslargeacrossstrategies
CorrelationofstrategieswithHFindexisgenerallyhigh
NoteinMalkielandSaha (2005)returnsarelower.Theyuseequalweighted(insteadofvalueweighted)returnsoftheTASSdatabase. Ingeneral,smallfundsperformworsethanlargefunds
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APrimeronHedgeFunds History,Compensation,
HedgeFundStrategies
Performance alphaversusbeta
o staleprices
o nonlinearpayoffs FocusI:MergerArbitrage
o MitchellandPulvino,2001,CharacteristicsofRiskandReturninRiskArbitrage,JofFinance
qu ty
s
an
s
anagement FundFlows LiquiditySpiralsandLeverage
CorrelationacrossHedgeFunds
Focus
II:
2007
Quant
crisis 31
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Biases Survivor allalivefundshavea20%deathrate
Backfill smoothoutreturns Selfreported
Estimationimpressionofmeanreturns ,if=15%,thenuncertaintyabout5yearmeanreturnis
1.96*15/5.5=+/13%
T/
Staleprices returnsmoothing
Nonlinearstrategies.
littlepersistenceinoutperformance
Conclusion
Evaluationofaveragereturnsoralphasisverynoisy
Evaluationofriskmeasureorbetasisuseful 32
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Jensen (riskthatisnotduetoloadingonmarketrisk)
ForCAPM=
][][
,,,
MPPP rErE +=
o P:tendencyofreturntoriseifmarketrises
o PrM,t:cangetsimplybeinvestinginindex(style)
o
P
o P,t:extrariskbeyondindexfund
Formultifactormodel
Appraisal(information)P
/
(takesleverageintoaccount)
33
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AppraisalRatio
S arpeRatio earnedaverageriskpremiumofportfolio/fundPperunitoftotalrisk
P
fP
rErE reynor n ex
earnedaverageriskpremiumofportfolio/fundPperunitofsystematic
risk(measuredbybeta)
P
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Hedge Fund Performance
on ro ng or e e urn an e e urn
40
60
80
-2 0
0
20
nnua
lalpha(percent)
-6 0
-4 0
A
-8 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
95th Percentile A lpha Average Alpha 5th Percentile Alpha Source: FRBNY calculat ions from TASS
Alpha for two factor model with S&P500 and VIX
Note cross-section alpha is getting compressed over time35
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Annual He de Fund S&P500 Betas TASS
3
4
1
2
-1
0
-3
-2
95th Percentile S&P500 Beta 5th Percentile S&P500 Beta Average S&P 500 Beta
VIX-beta looks similar 36
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More than 80% is explained by FF-factors
-Intercept is still significant But volatility is much lower 37
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makes . .
low
o Wronglylowers estimate,increaseestimate
Returnsappearlessvolatile
o Informationratioincreases
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Style ER (%/mo) a b a3 b3 Not zero!
Index 0.64 0.46 0.28 0.36 0.44
Std. errors 0.20 0.17 0.04
Short -0.53 0.10 -0.94 0.13 -0.99
Bigger with lags
Emerg mkts 0.39 0.00 0.58 -0.07 0.69
Event 0.61 0.46 0.22 0.38 0.37
Global Macro 0.93 0.82 0.17 0.74 0.31
Reallynot zero.
Long/Short Equity 0.73 0.42 0.47 0.32 0.65
erna ve asse
Long-short doesntmean zero beta!
& 500i s p i
t t tr a br = + + 1 2 1 3 2 4 3
1 2 3 4
33
i sp sp sp sp i
t t t t t t r a b r b r b r b r b b b b b
= + + + + += + + +
Source for following slides: John Cochranes website, idea from Asness et al JPM
ags are mpor an s a e pr ces or oo ac op onBetas are big!
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40Annual returns moving average
20
30
0
10
20
10
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 200440
30
HF index
market
Correlation with the market is obvious.
Getting out in 2000-2003 was smart! (Mostly due to Global/Macro group) 40
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10
Monthly returns on Global Macro HF and US market
5
0
10
5
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
15rmrf
GlobalMacro
Lagged market effect is clear in 1998. Is Nov/Dec 1998 unrelated to Oct?
Dramatic stabilization / change of strategy in mid 2000 41
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LinearCAPMregressioncannotcapturenonlinearpayoff
structurest atar se
Fromtradingoptions Replicatingoptionswithdynamictradingstrategies
PopularHFstrategy writingputoptions
You collect a fee, only pay off if the market goes down a lot.rov ng sas er nsurance
Most of the time, stock ends up here. You make a small profitindependent of stock price. Looks like alpha, arbitrage.
Stock price
Fee (put price)
Toda s rice
Writing put profit
Rarely, the stock ends up here. You lose a huge amount
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Merger announced Merger completedPrice
Offer price
Buyerger a s
Time
Cas
o er.
Borrow,
uy
target
s ort
acquirer.
Largechanceofasmallreturnifsuccessful.(Leverageup) Smallchanceofalar elossifunsuccessful. Butofferismorelikelytofailifthemarketfalls!
Payoffislikeanindexput! 43
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Lineindicatessimilaritytowritingindexputs
Mitchell and Pulvino, JF
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Occasionalcatastrophes
Catastrophesaremorelikelywhenmarketdeclines
Mitchell and Pulvino, JF
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y e up own
Index 0.44 0.08 0.77Short -0.99 -0.22 -1.82
xamp e: e mar e goes up10%, the HF index goes up 0.8%.But if the market goes down 10%,the HF index oes down 7.7%!
Emerg mkts 0.69 0.08 1.16
Event 0.37 0.18 0.47
Global Macro 0.31 -0.08 0.66Long/Short Eqty 0.65 0.19 1.18
1 2 1 3 2 4 3
1 2 3 4
33
i sp sp sp sp i
t t t t t t r a b r b r b r b r b b b b b
= + + + + += + + +
( 0) ( 0)i sp sp it up t down t t r a b r b r = + > + < +
(Includes 3 lags)
Betasarec osetoone
Hence,needoptionreturnbenchmarks 47
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ER alpha SPPo SMB HML
sp sp o
t i i t i t i t i t t r r SPPo s SMB h HML = + + + + +
mo pu s s ze va ue
Event Arb 1.03 0.04 -0.92 0.15 0.08
Restructure 1.29 0.43 -0.63 0.24 0.12Event driven 1.33 0.20 -0.94 0.31 0.12
Rel. value arb 1.15 0.38 -0.64 0.17 0.08
SPPo = return from rolling over out-of-the-money putsSource: Agarwal and Naik RFS, using HFR data
Largemarketbetasemerge
Alphasaresmaller 48
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Market,value,size,momentum,term,default,currenc
Optionsonallofthese
Problems
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APrimeronHedgeFunds History,Compensation,
HedgeFundStrategies Performance
alphaversusbetao staleprices
o nonlinearpayoffs FocusI:MergerArbitrage
o MitchellandPulvino,2001,CharacteristicsofRiskandReturninRiskArbitrage,JofFinance
Riskspillovers
FocusII:2007Quantcrisis
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Monthly returns for liquidated funds towards liquidation
(TASS)
1
1.2
0.2
0.4
0.6
.
t
-0.4
-0.2
0
.
25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Perce
-1
-0.8
-0.6
Months
51
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arg n un ngr s Primebroker
MarginhastobecoveredbyHFsowncapital Marginsincreaseattimesofcrisis
Rolloverrisk CP Inabilitytorollovershorttermcommercialpaper
OutflowoffundsforHFsandbanks
Maturitymismatch:Maturitymismatch:Longtermassets(withlowmarketliquidity)S ortterm orrow ng
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A v e r a g e L o c k - u p P e r i o d ( T A S S )
5
6
7
3
4
Numberofmonths
0
1
2
Lockupperiods
1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6
Sidepockets53
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Netwealth> x .
(constantorincreasingleverageratio)
BernankeGertler,
ReducedPositions
Marginspiral (forcestodelever)
PricesMoveAway
from FundamentalsFundingProblems
InitialLosses
e.g.credit
Losseson
ExistingPositions
Both spirals reinforce each other
Source: Brunnermeier & Pedersen (2007)
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Percentage of Hedge Funds using Leverage
64%
66%
68%
60%
62%
54%
56%
58%
50%
52%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: TASS
Somewhat surprising, fraction of funds using leverage is declining 55
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Margins/Haircuts:
Rating Jan-May 2007 July-Aug 2007
Bond
Investment grade 0-3 3-7
High yield 0-5 10+
Leveraged Loan
Senior 10-12 15-20
2nd lien 15-20 20-30
Mezzanine 18-25 30+
ABS and CDO
- -
AA 4-7 20
A 8-15 30
BBB 10-20 50
Equity 50 100
Source: Citigroup, IMF Stability report 2007
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Hedge Fund Performance and Leverage
80
40
60
)
73%
72%
53%66%
70%
68% 74%
66%
65%
77%
69%
-20
0
20
nnualalpha(percen 67%
67%
68%
71%
73%
64%
58%
65%
63%59%
66%
66%
66%64%
62%
60%
62%63%
64%65%
57%57%
58%
-60
-4077%
70%
-80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
95th Percentile Alpha Average Alpha 5th Percentile Alpha Source: FRBNY calculations from TASS
The red boxes indicate the percentage of funds in the top 5 percentile that use leverage.
The blue boxes indicate the percentage of funds in the bottom 5 percentile that use leverage.
The black boxes indicate the percentage of funds that use average leverage.
Topandbottomperformershavehigherleverage
In2005/06leverageishigh
In1998leverageislow 57
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Source: Jorion (2000) 58
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Crowdedtrades?
1998-08.8
Figure 4: Cross-sectional Correlation of Hedge Fund Returns
1998-08
0
15
Figure 3: Cross-sectional Covariance of Hedge Fund Returns
.2
.4
.
Correlation
0
5
1
Covariance
-.2
0
-10
-5
1994-01 1996-01 1998-01 2000-01 2002-01 2004-01 2006-01
Cross-Sectional Correlation Cross-Sectional Correlation MA(12)
1994-01 1996-01 1998-01 2000-01 2002-01 2004-01 2006-01
Cross-Sectional Covariance Cross-Sectional Covariance MA(12)
Vol declined greatmoderation59
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Highfrequencystatarbs Highfrequency,ITdriven,shorttermreversalstrategies
st th
e.g.RenaissancesMedallionfund
Low
frequency
quant
funds Valuegrowth(HML)strategy,momentumstrategy,earningtosaleratio,accrualstotalassetsratio,o Orthogonalize (diversification)
FXcarrytrades
e.g.GoldmanSachsGlobalAlpha,AQR,
became ver o ular crowded
60
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Why?Many(notonlyquant)fundsliquidaterelativelyliquidpositionsfirst liquidHMLsufferedevenmore
Quantfundsfocusonsamefewquantstrategies
o USfrom08/05/07+sharp(correlated)reboundon08/10/07
o Europe/Japanfrom08/08/07onwards 61
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E qu ity MarketNeutralInd ex Mac ro Ind ex G lob alIndex
100
105
urn
HFR indexes
95
CumulativeRe
85
/200
7
/200
7
/20
07
/20
07
/20
07
/200
7
/20
07
/20
07
/20
07
/200
7
/20
07
/20
07
/20
07
/20
07
Stat arb crisis
6 6 6/1
6/2
6/2 7 7/
17/
27/
2 8 8/1
8/1
8/2
8/3
Quant googols are needed to see it!62
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APrimeronHedgeFunds History,Compensation,
HedgeFundStrategies Performance
alphaversusbetao staleprices
o nonlinearpayoffs FocusI:MergerArbitrage
o MitchellandPulvino,2001,CharacteristicsofRiskandReturninRiskArbitrage,JofFinance
qu ty s an s anagement FundFlows
LiquiditySpiralsandLeverage
CorrelationacrossHedgeFunds
FocusII:2007Quantcrisis63
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Ste henJenSoverei nWealthFunds
History
fromvolatileoilprice
Evolved
from
stabilization
funds
to
wealth
accumulation
New:manyAsiancentralbanks
o anagereservest roug s
Size:US$2.9tr +300bnayear
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65
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Diversifyacross Assets
o sovereignbonds,agencies,corporate,equity,privateequity,realestate
Countrieso LargeimpactonUSTreasuries
Economicorstrategicinvestments
Geo oliticaldimension
Transparency Objectives,activities,performance
66
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