Funds of Hedge Funds

This book draws on the experience of leading practitioners across the hedge fund and funds of funds industry and brings you independent, practical and focused advice and experience from all perspectives -  investor, hedge fund and funds of funds managers, and legal and accounting advisors.

In 21 chapters the book examines all aspects of funds of funds and ensure you have a comprehensive understanding of their uses, structures, risks and rewards. The book offers expert advice on:

•  The nature and structure of the marketplace for funds of funds
•  How the investment process works
• Overcoming problems with asset allocation
• Making management selection decisions
• Diversification attributes and their benefits
• Effectively marketing funds of funds
• Risk mitigation applications of structured alternative investment products
• The legal and operational issues for funds of funds
• Establishing funds of hedge funds in low-tax jurisdictions
• Performance measurement and risk control and
• Accounting, administration and regulatory issues
  

Chapters from this book have been included in the new section on Risk and Investment Management in GARP's  2005 Financial Risk Management exam.

Contributors include:

Other titles edited by Sohail Jaffer:

• Alternative Investment Strategies (published 1998)
• Islamic Asset Management: Forming the Future for Shari'a-Compliant Investment Strategies  (published 2004)
• Islamic Retail Banking and Finance: Global Challenges and Opportunities (published 2005)
• Multi-Manager Funds: Long-Only Strategies for Managers and Investors (published 2006)
• Funds of Hedge Funds chapter in The New Generation of Risk Management for Hedge Funds and Private Equity Investments, edited by Lars Jaeger with 43 risk management experts (published 2003)

 Also by Alexander M Ineichen:

• Hedge Fund Risk chapter in The New Generation of Risk Management for Hedge Funds and Private Equity Investments, edited by Lars Jaeger with 43 risk management experts (published 2003)

 Also by Mark Anson:

• The fiduciary's perspective on alternative assets and institutional risk management chapter in The New Generation of Risk Management for Hedge Funds and Private Equity Investments, edited by Lars Jaeger with 43 risk management experts (published 2003)

Table of Contents

Funds of Hedge Funds: For Professional Investors and Managers
 
Contents
Author biographies
Foreword by Hans de Ruiter
Foreword by Mark Yusko
Preface
Sohail Jaffer

Part I: Understanding funds of funds


Chapter 1: The case for funds of funds
Alexander M Ineichen
Introduction
Industry characteristics
Investment philosophy
Risk and return
Advantages and disadvantages of funds of hedge funds
Value proposition


Chapter 2: Market characteristics
Christopher Merlini and Pascal Koppel
Historical background
Who invests in hedge funds?
How funds of funds operate
Portfolio construction
Types of funds of funds
Multi-manager hedge funds versus funds of funds
Conclusions


Chapter 3: Classification and diversification
Philip DiDio
Introduction
Classification
An example of a classification system
The challenge of classification
Sub-division case study: convertible arbitrage
Fund of funds diversification
Conclusions on diversification


Chapter 4: The future of funds of hedge funds
Sohail Jaffer
Introduction
Industry consolidation
Structured products
Hedge fund indices
Onshore hedge funds
Future perspectives

Part II: Asset allocation and manager selection


Chapter 5: Asset allocation from the institutional investor’s
perspective
Peter Todd
Introduction
The asset allocation problem
Funds of funds: benefits and obstacles
Funds of funds as an asset class
Funds of funds styles
Capital market assumptions
Three quantitative examples
Conclusion


Chapter 6: Manager selection
Omar Kodmani
Introduction
Individual hedge funds
Fund of funds managers
Final thoughts


Chapter 7: Marketing funds of funds
Sophie van Straelen
Introduction
Market environment
Competitive edges: key success factors
Analysing and presenting competitive edges
Corporate communication
Distribution channels
Legal constraints
Conclusions


Chapter 8: The significance of liquidity and transparency for
multi-manager AIS portfolios
Lars Jaeger and Werner E Rutsch
Introduction
The challenges of funds of funds
Liquidity for AIS
Liquidity and transparency
Liquidity of funds of funds
Conclusion

Part III: Structured products and strategies


Chapter 9: Structured alternative investment products
Mehraj Mattoo
Introduction
Fund derivatives: a brief overview
Which structured product to use?
Summary and conclusions


Chapter 10: Collateralised Fund Obligations
Mark Anson
Introduction
Overview of Collateralised Obligations
An example of a Collateralised Fund Obligation
Benefits of CFOs
Risks of CFOs
Summary


Chapter 11: Investing in hedge funds through insurance products
Brad F Cole and Christine M Kailus
Introduction
Insurance overview
Products for the sophisticated investor
PPLI regulation
Risks and other important considerations
Expanding the investor base
The international market-place
Summary and conclusions

Part IV: Establishment and operations


Chapter 12: Sponsoring start-up hedge funds
Hans Tischhauser
Introduction
How do hedge funds start?
Start-up managers: initial considerations
Issues regarding sponsors
The sponsor’s viewpoint
Different models
The economics of sponsoring start-up funds
Summary


Chapter 13: Legal issues in structuring and operating
funds of hedge funds
Stuart Martin
Identifying the structure
Identifying the domicile
Operating funds of hedge funds
Summary


Chapter 14: Establishing a fund of hedge funds in Luxembourg,
Ireland and Switzerland 
Claude Kremer, Claude Niedner, David Dillon,
Shelby R du Pasquier and Olivier Stahler
Introduction
Luxembourg 
Ireland 
Switzerland 
Conclusion

Part V: Performance measurement and risk control


Chapter 15: Performance measurement from the allocator’s
perspective
Virginia Parker
Introduction
Hedge fund databases and indices
Judging the quality of a hedge fund’s performance
Predictability of returns: determining the appropriate target
Summary


Chapter 16: Performance measurement issues for investors
Thomas Schneeweis, Hossein Kazemi and Richard Spurgin
Introduction
Characteristics of hedge funds
Creating funds of funds
Managing funds of funds: a risk diversification or return
enhancer approach
Monitoring funds of funds
Fund of funds creation, management and monitoring: state of the art
Funds of funds as absolute return strategies
Conclusions
Appendix 1: A comparison of indices
Appendix 2: Relative index performance, 1998–2002 (June)


Chapter 17: Risk control strategies: the manager’s perspective
Pierre-Yves Moix and Stefan Scholz
Introduction
Risk types and leverage
Risk monitoring and management
Conclusion


Chapter 18: Risk management: the investor’s perspective
Damian Johnson and Nick Macleod
Introduction: a cautionary tale
Due diligence
Identifying fund of funds risk
Risk monitoring and risk aggregation
Monitoring strategy drift


Chapter summary

Part VI: Administration, accounting and regulation


Chapter 19: Fund of hedge funds administration
Brenda Buckley
Introduction
The continuous process of due diligence
Establishment phase of a fund of hedge funds
Administration services
Custodian services overview of a fund of hedge funds
Operational flows and issues
Conclusions


Chapter 20: Taxation and accounting issues in funds of hedge funds
Joel Press
Introduction
IAS versus US GAAP
Operations
Fees
Equalisation
Reporting
CFTC
Technology and risk management
Listing
Currency
Principal-protected funds
Distributed securities
US tax issues
European taxation


Chapter 21: Fund of hedge funds regulation
Nathalie Dogniez
Introduction
Components of hedge fund regulations
Why regulate hedge funds?
The fund of hedge funds case
Taxation
Fund of hedge funds regulation: selective overview
Conclusions

Reviews

“An excellent and balanced overview of all major aspects of funds of hedge funds, written by an impressive line up of well-respected market practitioners...... Given the quality, topicality and relevance of this publication, I recommend every investorthat wants to stay ahead of the game to take note of it, digest it and turn it into proper action.”

Hans de Ruiter, Senior Portfolio Manager, ABP Investments

“A true source of practical and useful information...... provides a superb introduction to the industry, as well as important, detailed information related to the implementation, execution and maintenance of a top-tier hedge fund of funds programme”

Mark Yusko, President and CEO of University of North Carolina Investment Management Co.

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