Monday Morning Essays: Fund of Fun!

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dbfinley

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These three essay/ short answer q’s are going to cover all the papers concerning HFs. I’ll post the answers on Friday, but please feel free to answer any!
1. Compare the factor-replication approach to hedge fund replication with the payoff
distribution approach to hedge fund replication, in terms of their:
a. goals.
b. methodology.
c. ability to replicate hedge fund returns.
d. benefits.
e. drawbacks.
2. Compare and contrast active and passive strategies for distressed HF investing
3. Answer the question and describe the findings of Reddy et al, re: Whether FoFs are simply multistrategy funds with extra fees.
 
dbfinley,
Great stuff. Where are you pulling these essay questions from?
 
1st q is verbatim from the CAIA Study Guide for Level II they publish, the other 2 are just general qs that essentially if answered well show you’ve got a good understanding of the papers.
 
Busy day so I’ll give quick answers.
1) I never understood in the first place and was hoping someone would step up :(
2: Passive investing involves mainly trading and investing on the fundamentals, active investing means taking seats on the board and actively helping with the restructuring of the firm. Activist investing can help through 5 methods:
1)Investing to Sell
2)Cutting out corporate infrastructure
3) Working with the parts of the portfolios to find synergies
4) Being an Active Shareholder
5) Creating alignment of interest through performance based compensation
3: Are fund of funds multistrat funds with extra fees? In short answer no, While multistrat funds do have lower fees, and fee netting, there are advantages that FoFs have. However, Multistrat funds tend to charge the highest fees of the HF bunch at around 1.5% to 2% The paper details how when you move funds between strategies, there will be much less of an impact than when you move funds between managers. With FoFs you are going to experience less operational risk, because of the number of managers. 1 versus 20 or so with HFoF. Also the risk of Fraud and Headline risk is reduced. Again if you had 1 Madoff or Amaranth in your portfolio it wouldn’t kill you if you were a FOF, but would if you were a HF. Talent retention is also a problem, with multi strategy funds facing the issue of top traders, leaving to start their own funds, and struggling to fill their shoes.
 
I haven’t read the Current and Integrated Topics material yet but plan to start soon and will try to “step up” on your point 1.
 
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