Hedge Fund Portfolios
description
Transcript of Hedge Fund Portfolios
Hedge Fund Portfolios
Ezra Zask
Yale University
September 26, 2005
Benefits of Hedge Funds
Riskier than traditional investments?
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Iraq Crisis (8/90)
Asia Crisis (8/97)
Russia Crisis (8/98)
September 11 (9/01)
MSCI World
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MSCI World Equity Hedge Event Driven Relative Value
Hedge Fund Returns
Assets Risk Return Profile
Hedge Fund Style Beta and Alpha
Portfolio Optimization
• Requirements for Mean Variance Optimization– Returns
• Normally Distributed• Accurate Data• Time Frame
– Standard Deviation• Constant over time
– Correlations• Lower is better
Survivorship and Backfill Bias
Tremont Style Statistics
Summary Statistics - Factors.fld 1/1994-6/2005
N Periods
Geometric
Mean (%)
Arithmetic Mean (%)
Standard Deviation
(%)Sharpe Ratio
Skewness
Kurtosis Alpha Beta
Distressed Index 137 13.08 13.33 7.35 0.5541 -2.8986 18.4301 0.0084 0.2388
Emerging Markets Index 137 6.87 8.35 17.87 0.1407 -0.6758 4.6968 0.0015 0.5272
Equity Market Neutral Index 137 10.07 10.11 3.26 0.9371 0.3328 0.3286 0.0076 0.078
Event Driven Index 137 11.22 11.4 6.3 0.5489 -3.5662 25.1946 0.0072 0.211
Event Driven Multi-Strategy Index 137 10.2 10.4 6.64 0.4735 -2.6838 17.9901 0.0066 0.193
Fixed Income Arbitrage Index 137 6.33 6.41 4.05 0.4695 -3.0921 16.0501 0.0054 0.0073
Global Macro Index 137 13.66 14.38 12.92 0.3425 0.0192 2.5641 0.0099 0.1776
Hedge Fund Index 137 10.58 10.93 8.85 0.3742 0.133 2.1422 0.0065 0.256
Managed Futures Index 137 6.6 7.39 13.12 0.1686 0.0214 0.3497 0.0077 -0.1526
Fund of Funds Universe Average 137 7.21 7.38 6.14 0.3589 -0.1383 2.2125 0.0044 0.1967
CS F B/T re m on t Em e rg in g M a rke ts In de x : F e b rua ry 1994 - Ju ne 2005Returns Histogram
Return
NumberCS F B/T re m on t Em e rg in g M a rke ts In de x : F e b rua ry 1994 - Ju ne 2005
Returns Histogram
-24.0% 18.0%-22.0% -20.0% -18.0% -16.0% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
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Normal Distribution?
Hedge Funds in Portfolios
Hedge Funds in Portfolios
Efficient Frontier
Efficient Frontier
Hedge Fund Styles
Hedge Fund Styles
Background Information:Why Invest in Alternatives?
Alternative assets offer attractive
risk adjusted returns.
Notes:(1) Sources as follows: private equity and venture capital data from Venture Economics, hedge fund composite and
distressed data from Hedge Fund Research (HFR) and all other data from Pertrac database (2) Annualized volatilities computed from monthly and quarterly series under the assumption of independent returns
Historical Risk and Returns(1)(2)
January 1994 to December 2003
Hedge Fund Weighted Composite Index
S&P 500
90 day US T-Bill
LehmanAggregate Bond Index
Russell 2000 Small-Cap
EquityLehman High Yield Credit Bond Index
Distressed Debt Index
Private Equity Index
Venture Capital Index
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Annualized Volatility
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Alternatives’ returns are not highly correlated
with traditional investments.
Notes:(1) Sources as follows: hedge fund data from Hedge Fund Research (HFR); private equity and venture capital data from Venture
Economics and all other data from Pertrac database (2) The correlation between S&P 500 and Lehman Aggregate Bond Index over the same time period is 0.02
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Hedge FundMarket Neutral
Hedge FundMacro
Distressed Debt Private Equity Venture Capital
S&P 500 Lehman Aggregate Bond Index
Alternative Asset Correlations(1)(2)
January 1994 to December 2003
Alternatives enhance traditionalinvestment portfolios.
Notes:(1) For illustrative purposes only(2) These portfolios include US Equity (S&P 500), Int’l Equity (MSCI EAFE), US Fixed Income (Lehman Aggregate Bond Index), HedgeFund
Composite (Hedge Fund Research (HFR)), Distressed Debt (third party provider), Private Equity (Venture Economics) and Venture Capital (Venture Economics)
(3) This portfolio includes US Equity (S&P 500), Int’l Equity (MSCI EAFE) and US Fixed Income (Lehman Aggregate Bond Index)
No alternatives(3)
10% alternatives(2)
25% alternatives(2)
Risk/Return Tradeoff(1)
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Portfolio Volatility
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Fund of Funds Portfolios
Risk Exposure by Strategy
Market
Up
Market Down Volatility Volatility
Credit Spread
sCredit
Spreads Liquidity
Increases Decreases Widen Contract Crunch
Convertible Bond Arbitrage Flat Flat Up Down Down Up Down
Distressed Securities Up Down Down Up Down Up Down
Equity Hedge Fund Up Down Flat Flat Down Up Down
Equity Market Neutral Flat Flat Flat Flat Flat Flat Flat
Event Driven Up Down Down Up Down Up Down
Managed Futures Up Up Up Down Up Flat Up
Merger Arbitrage Up Down Down Up Down Up Down
Fixed Income Arbitrate Flat Flat Down Up Down Up Down
Style Risk Return
Ris k (STD)
Return (A M)Ja nu a ry 1990 - Jun e 2005Risk vs. Return
2.0% 19.0%3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0%
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CSFB/Tremont Convertible A rbitrage Index
CSFB/Tremont Dedicated Short Bias Index
CSFB/Tremont Emerging Markets Index
CSFB/Tremont Equity Market Neutral Index
CSFB/Tremont Event Driven Index
CSFB/Tremont Fix ed Income A rbitrage Index
CSFB/Tremont Global Macro Index
CSFB/Tremont Long/Short Equity Index
CSFB/Tremont Managed Futures Index
CSFB/Tremont Hedge Fund Index
TA SS Fund of Funds Universe A verage
Style Correlations 1/1994-6/2005
Style Correlations
Distressed EmergingMarkets
EquityMarketneutral
Event Driven Multi Fixed Income Macro HF Index Futures FoF
Distressed Index 1 0.5823 0.363 0.9357 0.7509 0.3117 0.3161 0.5796 -0.1267 0.661
Emerging Markets Index 0.5823 1 0.2464 0.6653 0.6665 0.2751 0.419 0.6535 -0.0991 0.7399
Equity Market Neutral Index 0.363 0.2464 1 0.3918 0.3658 0.1133 0.2098 0.3364 0.1231 0.4441
Event Driven Index 0.9357 0.6653 0.3918 1 0.9317 0.3881 0.3824 0.6691 -0.1741 0.7577
Multi-Strategy Index 0.7509 0.6665 0.3658 0.9317 1 0.4289 0.4279 0.6878 -0.1948 0.7616
Fixed Income Arbitrage Index 0.3117 0.2751 0.1133 0.3881 0.4289 1 0.4541 0.4476 -0.0685 0.426
Global Macro Index 0.3161 0.419 0.2098 0.3824 0.4279 0.4541 1 0.8587 0.2445 0.6453
Hedge Fund Index 0.5796 0.6535 0.3364 0.6691 0.6878 0.4476 0.8587 1 0.1264 0.9082
Managed Futures Index -0.1267 -0.0991 0.1231 -0.1741 -0.1948 -0.0685 0.2445 0.1264 1 0.1171
Fund of Funds 0.661 0.7399 0.4441 0.7577 0.7616 0.426 0.6453 0.9082 0.1171 1
Problems with Portfolio Optimization1990-2005
Optimal Allocation
Convertible Arbitrage Index 0.00
Dedicated Short Bias Index 0.00
Emerging Markets Index 0.00
Equity Market Neutral Index 8.23%
Event Driven Index 45.57%
Fixed Income Arbitrage Index 0.00
Global Macro Index 46.20%
Long/Short Equity Index 0.00
Managed Futures Index 0.00
TASS Fund of Funds Universe Average
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Summary Statistics
Expected Return 1.00
Standard Deviation 1.96
Sharpe Ratio 0.51
Standard Deviation (Risk)
Expected Return
0.0 6.00.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4 4.8 5.2 5.6
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CSFB/Tremont Convertible Arbitrage Index
CSFB/Tremont Dedicated Short Bias Index
CSFB/Tremont Emerging Markets IndexCSFB/Tremont Equity Market Neutral Index
CSFB/Tremont Event Driven Index
CSFB/Tremont Fixed Income Arbitrage Index
CSFB/Tremont Global Macro IndexCSFB/Tremont Long/Short Equity Index
CSFB/Tremont Managed Futures Index
CSFB/Tremont Hedge Fund Index
TASS Fund of Funds Universe Average
Unconstrained Optimization 1990-1995
5%-20% Optimization1990-2005
CSFB/Tremont Convertible Arbitrage Index 9.09
CSFB/Tremont Dedicated Short Bias Index 5.00
CSFB/Tremont Emerging Markets Index 5.00
CSFB/Tremont Equity Market Neutral Index 20.00
CSFB/Tremont Event Driven Index 20.00
CSFB/Tremont Fixed Income Arbitrage Index 5.00
CSFB/Tremont Global Macro Index 15.17
CSFB/Tremont Long/Short Equity Index 5.74
CSFB/Tremont Managed Futures Index 5.00
CSFB/Tremont Hedge Fund Index 5.00
TASS Fund of Funds Universe Average 5.00
Expected Return 0.80
Standard Deviation 1.25
Sharpe Ratio 0.64
Position 50
CSFB/Tremont Convertible Arbitrage Index (9.09%)
CSFB/Tremont Dedicated Short Bias Index (5.00%)
CSFB/Tremont Emerging Markets Index (5.00%)CSFB/Tremont Equity Market Neutral Index (20.00%)
CSFB/Tremont Event Driven Index (20.00%)
CSFB/Tremont Fixed Income Arbitrage Index (5.00%)
CSFB/Tremont Global Macro Index (15.17%)CSFB/Tremont Long/Short Equity Index (5.74%)
CSFB/Tremont Managed Futures Index (5.00%)
CSFB/Tremont Hedge Fund Index (5.00%)
TASS Fund of Funds Universe Average (5.00%)
5%=20% Optimization1990-2005
Standard Deviation (Risk)
Expected Return
0.0 6.00.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4 4.8 5.2 5.6
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CSFB/Tremont Convertible Arbitrage Index
CSFB/Tremont Dedicated Short Bias Index
CSFB/Tremont Emerging Markets IndexCSFB/Tremont Equity Market Neutral Index
CSFB/Tremont Event Driven Index
CSFB/Tremont Fixed Income Arbitrage Index
CSFB/Tremont Global Macro IndexCSFB/Tremont Long/Short Equity Index
CSFB/Tremont Managed Futures Index
CSFB/Tremont Hedge Fund Index
TASS Fund of Funds Universe Average
5%=20% Optimization1990-2005