Wednesday, April 30, 2014
Wilson, Visual Guide to Hedge Funds
Wilson’s book will have a captive audience because it is required reading for the Certified Hedge Fund Professional (CHP) designation that, as it turns out, the author and his team offer. (I must admit that I had never heard of this certificate program, but according to the book, over 1,400 people have participated in it globally.) Wilson is, perhaps more notably, the founder of the Hedge Fund Group, the largest hedge fund association with over 115,000 global members.
The book covers the most common hedge fund strategies: long/short equity, global macro, event-driven, fixed-income, convertible-arbitrage, and quantitative and algorithmic trading. In addition, it has chapters on managed futures, credit- and asset-based lending, multi-strategy hedge funds, and fund of hedge funds. As befits a basic text for a self-directed certification program, it includes tests after each chapter.
Readers who have some familiarity with hedge funds and with trading in general won’t learn much from this book. For instance, the chapter on quant and algo trading introduces a few chart patterns (head and shoulders, flags), the notion of momentum (as measured by MACD), and portfolio optimization. Perhaps the most useful information for the more sophisticated reader comes from the brief interviews at the end of each chapter. The quant hedge fund manager whom Wilson interviewed suggests (referencing the outsize and longstanding success of Renaissance Technologies) that “the way pure multi-strategy quant funds have been competing is by looking at ever smaller time slices.” (p. 128) That is, essentially by turning themselves into high frequency trading firms.
Do hedge funds provide investors with a decent return? Well, of course, that depends. But “according to data from Hedge Fund Research, Inc. (2013) over the past 14 years the Sharpe ratio on long/short equity strategies is approximately 1.12 compared to a Sharpe ratio of a long-only strategy targeting the S&P 500 index. Long/short equity strategies have a 71 percent correlation to U.S. stocks but produce a return profile that is much higher, 12.75 percent compared to an annualized return of 8.93 percent. The standard deviations of the returns are 9.18 percent for long/short equity while they are much higher at 14.97 percent for U.S. equities.” (p.43) I assume that returns are calculated before management and performance fees.