Wednesday 2016-11-02

Hedge Fund Alpha by John M Longo

While Longo can be forgiven for the fairly remote coverage of market microstructures, the risk management section(s) could use revision and extension.

That said, the best part of the book is this chart:

“Hedge fund risk management” seems to be somewhat an oxymoron given many recent high profile failures, but is there any value that can be added to this topic?
-- Preface
Leinweber (1995) analyzed the “paper” versus actual performance of a mutual fund that attempted to replicate a portfolio of Value Line’s highest rated stocks. The “paper portfolio” had an annual return of 26.2% over the 1979–1991 period, but the actual fund, based on the same stock picks, earned only 16.1% per year. Perold (1988) has called the gap between “paper” and real returns the “implementation shortfall.”
-- Introduction
The process of best execution takes on increasing importance in “crowded trades” or those where many hedge fund managers are following the same core strategy. For example, a common trade for many Long / Short hedge funds over the 2007 to mid-2008 time period was to be short Financial stocks and long Energy stocks.
-- Best Execution of HF Strategies