Wednesday, February 13, 2013

Mirabile, Hedge Fund Investing

Kevin R. Mirabile’s Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance (Wiley, 2013) covers a lot of familiar territory, including the standard fund strategies. But it’s more sophisticated and provides more color than the run-of-the-mill hedge fund book, and therein lies its strength.

Mirabile is both a practitioner and an academic, and he tailors his book accordingly. It addresses potential hedge fund investors, professionals, and students. In its (dominant) textbook “personality” it includes discussion questions and problems as well as extensive bibliographies at the end of each chapter. It also deals with topics that I suspect most individual investors would find abstruse, such as economies of agglomeration or skills and staffing requirements that are unique to a particular investing style. The individual looking to invest in a hedge fund or a fund of funds would probably doze off part way through the book. His notion of due diligence would be severely strained. The student or professional, on the other hand, would keep turning pages and continue to be rewarded for his effort.

After an overview of hedge funds and a discussion of strategies, the author turns in the final part of the book to evaluating factors influencing individual fund risk and reward: measuring performance and performance persistence, the impact of fund characteristics and terms on performance, performing due diligence on specific managers and funds, and evaluating the roles of service providers.

On the first topic he contends that “investors evaluating a particular manager’s track record or a fund’s performance should prepare their analysis from four distinct perspectives. 1. What is the historical net return and volatility of the fund under review, both stand-alone and relative to peers or strategy indices? 2. Are the returns of the fund and the strategy normally distributed, and if not, what is the implication for future return expectations and potential fat tail risk? 3. What is the sensitivity of the current portfolio to future changes in specific market variables such as rates and credit spreads to the value of the S&P 500 market? 4. How reliable are the data being used in the performance or risk analysis, and are they biased?” (p. 234) Mirabile briefly explains the concepts necessary to answer these questions.

The book includes numerous tables, charts, and graphs that elaborate on the author’s points.

Although Hedge Fund Investing is not a must-have book for the individual investor, it would be useful for anyone managing a large portfolio or contemplating setting up shop.

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