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Sponsors | Agenda | Participants | Presentations | Keynote | Companion Program | Canadian Investment Review
Canadian Investment Review - UBC Bureau of Asset Management
Global Investment Conference
Whistler, BC
April 2001
Global Hedge Funds - An Alternative Asset Class
Professor Rob Heinkel
Faculty of Commerce
University of British Columbia
Hedge Funds Defined
History
Organization:
- Domestic (US)
- Offshore (non-US)
Fee Structures:
- Base Management Fee
- Average = 1.4% of assets p.a.
- Incentive Fee
- Average = 16.2% of "profit"
- High water mark requirement
The Hedge Fund Industry - as of June 1997
(Hedge Fund Research data)
921 hedge funds with total assets under management of $190 Billion
This includes 92 funds that drop out of the sample before June 1997
| Mean | Median | |
| Assets under management | $94 mil | $21 mil |
| Management Fee | 1.4% | 1.0% |
| Incentive Fee | 16.2% | 20.0% |
| Minimum investment | $598K | $250K |
| Lockup Period | 84 dys |
- 84% of funds use leverage:
- these funds have the same average return as unlevered funds, but a higher volatility
- 74% of funds are offshore or both domestic and offshore:
- "both" category has higher average return and higher volatility
- 80% of funds have a high water mark requirement:
- these funds have both higher average return and higher volatility
Hedge Fund Investment Styles
(Managed Account Reports Classification)
Event Driven
- Distressed securities: bankrupt or financially distressed firms securities
- Risk Arbitrage: long target firms, short acquiring firms in potential mergers
Global
- International: global holdings, but with a "bottom-up" stock philosophy
- Emerging markets: harder to short investments
- Regional: more use of index derivatives
Global Macro
- Major global economic themes, with primary focus on interest rate moves;
- much use of leverage and derivatives
Market Neutral
- Long-short stocks: offsetting stock positions means low market exposure
- Convertible Arbitrage: Long convertibles, short underlying stocks
- Stock Index Arbitrage
- Fixed Income Arbitrage
Short Sales
- Fund is short most of the time
US Opportunities
- Value
- Growth
Fund of Funds
Hedge Fund Performance
Raw Returns (%)
| For periods ending 31 Dec. '95: | 2 years | 8 years | ||
| Mean | Median | Mean | Median | |
| Event Driven | 11.1 | 11.6 | 17.9 | 15.0 |
| Global | 5.7 | 5.9 | 19.3 | 17.4 |
| Global Macro | 9.8 | 9.1 | 20.5 | 19.5 |
| Market Neutral | 9.9 | 8.9 | 8.0 | 7.8 |
| Short Sales | 5.6 | 3.6 | ||
| US Opportune | 16.0 | 14.3 | 14.9 | 16.6 |
| Fund of Funds | 3.2 | 3.6 | 11.4 | 10.1 |
| Total | 9.2 | 8.9 | 16.1 | 15.0 |
Active Returns in Excess of the MCSI EAFE Index (%)
| For periods ending 31 Dec. '95: | 2 years | 8 years | ||
| Mean | Median | Mean | Median | |
| Event Driven | 1.3 | 1.8 | 9.2 | 6.3 |
| Global | -4.1 | -3.9 | 10.6 | 8.7 |
| Global Macro | 0.0 | -0.7 | 11.8 | 10.8 |
| Market Neutral | 0.1 | -0.9 | -0.7 | -0.8 |
| Short Sales | -4.2 | -6.2 | ||
| US Opportune | 6.3 | 4.5 | 6.2 | 7.8 |
| Fund of Funds | -6.6 | -6.2 | 2.8 | 1.5 |
| Total | -0.6 | -0.9 | 7.5 | 6.3 |
Hedge Fund Performance
Active Returns in Excess of the S&P500 Index (%)
| For periods ending 31 Dec. '95: | 2 years | 8 years | ||
| Mean | Median | Mean | Median | |
| Event Driven | -8.3 | -7.8 | 1.4 | -1.6 |
| Global | -13.7 | -13.5 | 2.7 | 0.8 |
| Global Macro | -9.6 | -10.3 | 4.0 | 2.9 |
| Market Neutral | -9.6 | -10.5 | -8.6 | -8.7 |
| Short Sales | -13.8 | -15.8 | ||
| US Opportune | -3.4 | -5.1 | -1.7 | 0.0 |
| Fund of Funds | -16.3 | -15.8 | -5.1 | -6.4 |
| Total | -10.3 | -10.5 | -0.4 | -1.5 |
Hedge Fund Volatilities Versus Mutual Fund Volatilities
| Standard deviations: (monthly returns) |
Hedge Funds | Mutual Funds |
| 2 years: | .034 | .025 |
| 8 years: | .037 | .031 |
Risk-adjusted Performance
| Hedge Fund | Mutual Fund | |||
| Sharpe Ratio: | Mean | Mean | EAFE Index | S&P500 Index |
| 2 years: | .145 | .144 | .107 | .415 |
| 8 years: | .231 | .192 | .045 | .246 |
| Hedge Fund Class | Beta | Alpha | |
| Event Driven | .36 | 5.0% | | Low market |
| Market Neutral | -.04 | 4.9% | | exposure leads |
| US Opportunity | .64 | 4.0% | | to high Jensen's |
| Global | .29 | 24.5% | | alphas |
Correlations:
| S&P500 | USTreas | EAFE | Growth | Value | |
| Event Driven | .25 | .51 | .39 | .03 | .49 |
| Market Neutral | -.04 | .00 | .36 | -.08 | .01 |
| US Opportunity | .83 | .89 | .40 | .77 | .81 |
| Global | .20 | .50 | .22 | .08 | .33 |
- Hedge funds offer diversification possibilities with traditional asset classes
Hedge Fund Returns "Style Analysis"
Five "style drivers" that drive returns (R-squared of .43):
"Systems trading - opportunities"
technically-driven trades that result in occasional bets on market events
"Global - macro"
funds using only the most liquid international markets, using bonds and currencies to bet on macroeconomic events like devaluations or monetary policy changes
"Value"
bottom-up identification of undervalued individual companies; this style factor is highly correlated with the US market
"Systems trading - trend follower"
technically-driven rules that identify momentum
"Distressed"
finding bankrupt or distressed companies and longing or shorting their securities; this style factor is highly correlated with the high-yield corporate bond market
Hedge Funds - An Alternative Asset Class
Conclusion
- Few investment restrictions
- Highly motivated management
- Low correlation with traditional asset classes
- Variable comparative performance results