Hedge Funds

Summaries

Classification of Hedge Funds

Long/short funds – not market neutral (seek higher return from long than short)

Market-neutral funds – hedge to have zero exposure to market (zero beta, long hedged by short)

- dollar neutral – same amount of long and short in terms of dollar but might not be market-neutral due to different betas

Global macro funds – bet on direction of a market, currency, interest rate

Event-driven Funds – distressed company, potential mergers

Use ex post alpha and Sharpe ratio to evaluate the performance of Hedge funds

Difficult to measure the performance

1)      Changes in Leverage

2)      Changes in Hedging Techniques

3)      Style Drift

4)      Portfolio Turnover

Fixed income hedge funds – best benchmarked by Merrill Lynch High Yield Index

Equity hedge funds – best by Russell 3000

Backfill bias – only well-performed funds will be added to the index