Empirical Analysis of Fund of Hedge Funds ( Tass database)

1. Empirical Analysis of Fund of Hedge Funds (Tass database) Presented to: Research Project and Working Paper

3. ‘In the business world, the rearview mirror is always clearer than the windshield’ - Warren Buffett -

4. Research Purpose • Comparative time series analysis of Fund of Hedge Funds vs. Single Manager Funds • Estimating the impact of leverage on downside volatility and risk • Constructing style indices from risk parameters and AUM weightings • Automating data import and data analysis for future quantitative analysis (‘dashboard’)

5. Code Execution (1/2)

6. Code Execution (2/2)

7. Hedge Fund Categories (TASS)

8. Data Import Access Database Excel Pivot table report

9. Risk-Return Parameters (1/2) • Return on Investment • Downside Risk • Standard Deviation • Downside Deviation • Value at Risk • Modified Value at Risk • Maximum Continuous Drawdown

10. Risk-Return Parameters (2/2) • 3-Factor Regression • Regression Alpha • Average Error term • Information Ratio Adaptation Current Research

11. Statistical Tests • Strategy 1 • Leverage • Strategy 2 • Leverage Unbalanced ANOVA (within and between treatments) t – test (leverage vs. no leverage) t – test (between strategies) t – test for equal means t – test for equal means t – test for equal means • Strategy 1 • No Leverage • Strategy 2 • No Leverage t – test for equal means

12. User Guide (1/4) Step 1: Copy folder to desktop or hard drive

13. User Guide (2/4) Step 2: Manual amendments to source code '*********************************************** '-->RAWDATA() 'Rotate through PivotItems Strategy '1 = Convertible Arbitrage '2 = Dedicated Short Bias '3 = Emerging Markets '4 = Equity Market Neutral '5 = Event Driven '6 = Fixed Income Arbitrage '7 = Fund of Funds '8 = Global Macro '9 = Long/Short Equity '10 = Managed Futures '*********************************************** 'set index and endloopi to stategy in focus (e.g. 7 for Fund of Funds) 'set endloopj and startloopj to strategies compared 'e.g. comparing Fund of Hedge Funds to Fixed Income Arbitrage : index = 7 endloopi = 7 endloopj = 7 startloopj = 6

14. User Guide (3/4) Step 3: Open spreadsheet shell and start execution

15. User Guide (4/4) Step 4: Fill in Userform Select hard drive Select file path Select parameter

16. Example Output (1/2)

17. Example Output (2/2) Significance Joint starting point

18. Empirical Findings (1/2) • Measures of volatility and downside risk were significantly improved for FoHFs, compared to their single-strategy peers • No evidence was found that FoHF strategies overcharge for risk diversification benefits • With reference to continuous drawdown, attrition rates and VaR, FoHFs are a valuable supplement to the institutional portfolio

19. Empirical Findings (2/2) • It could not be established whether gearing affected hedge fund performance – either favourably or adversely • Some statistical evidence could be found of a higher exposure of leveraged funds to the recent subprime crisis

20. Extended Research • Hedge Fund Linear Pricing Models • Sharpe Factor Model (Sharpe, 1992) • Constrained Regression (Otten, 2000) • Fama-French Factor Model (Fama, 1992) • Factor Component Analysis (Fung, 1997) • Simulation of Trading component (lookback straddle)

21. Prediction Models

22. Sources