Hedge funds structure, strategies, and performance

 i Hedge Funds FINANCIAL MARKETS AND INVESTMENTS SERIES H Kent Baker and Greg Filbeck, Series Editors Portfolio Theory and Management Edited by H Kent Baker and Greg Filbeck Public Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Private Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Investment Risk Management Edited by H Kent Baker and Greg Filbeck Private Equity: Opportunities and Risks Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange-​Traded Funds: Building Blocks to Wealth Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Financial Behavior: Players, Services, Products, and Markets Edited by H Kent Baker, Greg Filbeck, and Victor Ricciardi  iii Hedge Funds STRUC TUR E , S TR ATE GIE S , A ND P E RF ORMA NC E H KENT BAKER and GREG FILBECK 1 Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America © Oxford University Press 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Library of Congress Cataloging-in-Publication Data Names: Baker, H Kent (Harold Kent), 1944– editor | Filbeck, Greg, editor Title: Hedge funds : structure, strategies, and performance / [edited by] H Kent Baker and Greg Filbeck Description: New York City : Oxford University Press, 2017 | Includes index Identifiers: LCCN 2016041675 | ISBN 9780190607371 (hardcover) Subjects: LCSH: Hedge funds Classification: LCC HG4530 H38834 2017 | DDC 332.64/524—dc23 LC record available at https://lccn.loc.gov/2016041675 9 8 7 6 5 4 3 2 1 Printed by Sheridan Books, Inc., United States of America  v Contents List of Figures    ix List of Tables    xiii Acknowledgments    xv About the Editors    xvii About the Contributors    xix Abbreviations    xxxiii Part One   INTRODUCTION Hedge Funds Fundamentals    3 H KENT BAKER AND GREG FILBECK The Economics of Hedge Funds    22 S H A N TA N U D U T TA , A R U P G A N G U LY, A N D   L I N   G E The Life Cycle of Hedge Funds: A New Perspective    38 MILA GETMANSKY SHERMAN AND RACHEL (KYUNGYEON) KOH Characteristics of Successful Hedge Fund Managers    60 A S H R A F E E T H O S S A I N , S A M I R S A A D I , A N D M A X I M   T R E F F Part Two   THE STRUCTURE OF HEDGE FUNDS Hedge Fund Organization    75 DOUGLAS CUMMING, NA DAI, AND SOFIA JOHAN v vi Co ntents Hedge Fund Governance    93 L A M I A C H O U R O U , A S H R A F E E T H O S S A I N , AND SAMIR SAADI Activist Hedge Funds    107 TO N Y C A L E N D A , C H R I S TO P H E R M I L L I K E N , AND ANDREW C SPIELER The Tax Framework of Hedge Funds    125 F R A N Ç O I S - S​ E R G E L H A B I TA N T A N D M I C H E L B R O C A R D Compensation and Incentives in Hedge Funds    147 G A R R E T T C   C S M I T H A N D G A U R AV   G U P TA 10 Offshore Hedge Funds    162 R O B E R TO J S A N T I L L Á N - ​S A L G A D O A N D J UA N J O S É G A R C Í A - ​S A N TO S Part Three   INVESTMENT STRATEGIES OF HEDGE FUNDS 11 Directional Equity Strategies of Hedge Funds    185 O R E S T E A U L E TA A N D F I L I P P O S T E F A N I N I 12 Event-​Driven Hedge Fund Strategies    207 C A R O L I N E F A R R E L LY A N D F R A N Ç O I S - S​ E R G E L H A B I TA N T 13 Global Derivatives Hedge Fund Strategies    228 C H R I S TO P H E R J B A R N E S , E H S A N N I K B A K H T, AND ANDREW C SPIELER 14 Relative Value Hedge Fund Strategies    242 G E O R G E D I K A N A R O V, J O S E P H M C B R I D E , AND ANDREW C SPIELER 15 Multistrategy Hedge Funds    259 PA U L - ​H E N R I B AYA R T- ​D E - ​G E R M O N T A N D D A N I E L C A P O C C I  vii C on t e n t s Part Four   RISKS AND REGULATION 16 Risk Measurement and Management for Hedge Funds    283 GUILLAUME WEISANG 17 Hedge Funds and Systemic Risk    305 W U L F A K A A L A N D T I M OT H Y A   K R A U S E 18 Operational Risk Management for Hedge Funds    320 CLAUS HUBER AND DANIEL IMFELD 19 Hedge Fund Due Diligence    344 JASON SCHARFMAN 20 Hedge Fund Regulation    359 WULF A KAAL AND DALE A OESTERLE Part Five   HEDGE FUND PERFORMANCE 21 Issues in Hedge Fund Research    379 T H U Y B U I A N D A B H I S H E K G A N G U LY 22 Hedge Fund Pricing    394 D AV I D H A M P TO N 23 Evaluating Hedge Fund Performance    415 D AV I D M   S M I T H 24 Financial Crises and Evaporating Diversification Benefits of Hedge Funds    439 M O N I C A B I L L I O, M I L A G E T M A N S K Y S H E R M A N , AND LORIANA PELIZZON 25 Hedge Fund Replication    460 M I K H A I L T U P I T S Y N A N D PA U L L A J B C Y G I E R 26 Hedge Funds and Performance Persistence    491 N A N Q I N A N D Y I N G   WA N G vii viii Co ntents 27 Benchmarking and Bias in Hedge Funds    510 JEFFREY S SMITH, KENNETH SMALL, AND PHILLIP NJOROGE 28 Style Analysis and Consistency    524 W I L L I A M R M C C U M B E R A N D J Y OT S A A N A PA R A J U L I Part Six   ISSUES, TRENDS, AND FUTURE PROSPECTS OF HEDGE FUNDS 29 Current Hedge Fund Debates and Controversies    547 DIANNA C. PREECE 30 Trends and Future Prospects of Hedge Funds    566 HUNTER M HOLZHAUER Discussion Questions and Answers (Chapters 2–30)    585 Index    623  ix List of Figures 3.1 3.2 3.3 3.4 3.6 5.1 7.1 7.2 8.2 8.3 8.4 10.1 10.2 10.3 0.4 10.5 10.6 10.7 11.1 1.2 11.3 11.4 Growth in Activism Campaigns in the United States, 2010 to 2015  30 Yearly Percentage Changes in the Number of Funds, 1985 to 2014  39 Assets under Management in the Hedge Fund Industry, 1985 to 2014  39 Concavity and Convexity  43 Returns versus Past Asset Sizes for All Hedge Funds and Individual Categories 44 Reasons for Dropping Hedge Funds in the Lipper TASS Database  54 Payoff to a Call Option  55 Typical Parties Appointed to Operate a Hedge Fund  76 Activist Hedge Fund Returns versus Other Hedge Fund Strategies  114 S&P U.S Activist Interest Index Total Return versus S&P U.S Broad Market Index Total Return  115 Major Locations Used to Legally Register Hedge Funds  126 Major Locations Used to Manage Hedge Funds  126 Typical Structure of a U.S Hedge Fund Set Up as a Limited Partnership  128 Typical Structure for a Pure Offshore Hedge Fund  140 Domicile of Offshore Hedge Funds  175 Domicile of Onshore Hedge Funds  176 Number of Funds Following Different Strategies Classified as Offshore and Onshore Hedge Funds  177 Total Net Assets by Hedge Fund Strategy  178 Yield to Date of Onshore and Offshore Hedge Funds  179 Offshore and Onshore Hedge Funds Average Total Returns over Different Periods  180 Maximum and Minimum Returns for Offshore and Onshore Hedge Funds 180 Net Exposure in Nominal and Beta-​Adjusted Terms for a Hypothetical Long/​Short Equity Fund  189 Evolution of Gross and Net Exposure for a Long/​Short Equity Fund  191 Evolution of Gross and Net Exposure for a Long/​Short Equity Fund with a Variable Bias  192 Breakdown of Exposures by Sector for a Long/​Short Equity Fund  193 ix 644 I nd ex option-​like nature of management incentives, 152, 159 option-​like strategies, 503 options trading strategy global macro strategies, trading volatility iron condor option strategy, volatility trade using, 237–​238, 238f options trading and capital gains, 237–​238 VIX options trading, 237 reporting biases and anomalies average monthly returns, 416, 417t backfill bias, 417, 418t bias-​free average returns, unwinsorized and winsorized, 419–​420, 421t common performance metrics, 420, 423t survivorship bias, 418, 419t risk-​factor based performance models, 428, 429t Organisation for Economic Co-​operation and Development (OECD) report linking corporate governance to attracting capital to finance growth, 96 organizational structure See also corporate governance; domicile; managers; registration agency problems in hedge fund organizations, 79 fees, 78–​79 forms of organizations corporations, offshore hedge funds, 99–​100 limited partnerships, 99 general partners See general partners investor base, 77 leverage, 78 limited partners See limited partners liquidity, 77 mutual funds and private equity funds, hedge funds distinguished from, 76–​79 offshore hedge funds, 167–​169 corporations, 99–​100, 167 legal status, 166–​167 limited partnerships, 168–​169 master feeder structure, 168–​169 onshore hedge fund registration, contrasted, 167 regulations, 172 unit trusts, 168 parties appointed to operate hedge fund, 76–​77, 76f pricing, 77 proprietary investment, 78–​79 regulatory oversight, 78 responsive managerialism, 99 strategies, generally, 77–​78 structural disadvantages of hedge funds, 5 structure of typical fund, 127–​128, 128f transparency, 77 types of investors, 77 valuation, 77 out-​of-​the money call and put options performance persistence, 503 yield enhancement strategies, 196 outsourcing future trends, 580 operational risk in, 338–​339 overconfidence, 573–​574 pair trades strategy, 186, 199 participation constraint, 25, 27 parties appointed to operate a hedge fund, 76–​77, 76f See also managers partners See general partners; limited partners partnership interest, sale or liquidation of, 133–​134 passive foreign investment companies (PFICs) investors, Cayman Islands offshore corporation, 142–​143 performance, offshore vs onshore hedge funds, 166 passive investing, 217 peer group trading, 254–​255 pension funds activist hedge funds, 107–​108 California state retirement system (CalPERS) activist hedge funds, 108 divestment shift away from hedge funds, 550, 568–​569 fees, asset allocation decisions influenced by, 550 global proxy voting principles, 96 fees, debate, 550–​552 future trends, 568–​569 low returns /​high fees, 551–​552 performance See also reporting returns; specific hedge fund strategy absolute performance target, 284 assessment difficulties, generally, 7–​8 benchmarking See benchmarking biases database biases, generally See performance evaluation, database biases measurement biases See performance measurement and evaluation characteristics of fund associated with, 431–​435 data collection audited financial statement review, 351–​352 Form PF, 311, 364–​366 material nonpublic information, considerations, 352–​353 data selection See performance measurement and data selection evaluation of data See performance measurement and evaluation flow performance relationship, 89 future trends, 571, 575 global macro strategies, statistics, 230, 232–​233   645 I n dex hedge fund replication, relative performance of, 481–​487 managed futures funds, 232–​233 managers, performance measures, 63–​64 measurement of data selection See performance measurement and data selection evaluation See performance measurement and evaluation offshore vs onshore hedge funds, 163–​166 persistence See performance persistence size of fund, relationship to See performance and size of fund, relationship between systematic managed vs discretionary managed futures funds, 232–​233 performance, characteristics of fund associated with, 431–​435 active management, degree of deviation from benchmarks, 434–​435 association between fund size and performance, 431–​432, 434f certain systemic investment approaches as determinant to performance, 434 characteristics, generally, 415 cross-​sectional return dispersion, 435 offshore vs onshore hedge funds, 163–​164 performance based on fund size, 431–​432, 433t returns and assets under management (AUM), relationship between, 431–​434 strategy distinctiveness, 434 performance, offshore vs onshore hedge funds, 163–​166 characteristics of funds, 163–​164 investors, differences in, 165–​166 lockup provisions, 164–​165 passive foreign investment companies (PFICs), 166 predictions, 165–​166 regulations, 164, 165 performance and size of fund, relationship between, 44–​49, 57 association between, 431–​432, 434f future trends, 574–​575 larger funds, lower returns than smaller funds, 47–​49 liquidation, 44 optimal asset size, calculation of, 44, 47 performance based on fund size, 431–​432, 433t rate of returns vs past assets sizes, 44–​49, 44f–​48f, 57 returns and assets under management (AUM), 431–​434 performance evaluation, database biases, 17, 415–​436 assessment difficulties, generally, 7–​8 availability of data, 380–​381 645 backfill bias (also known as instant history bias), 8, 416–​417 benchmarking, consequences of bias, 515–​516 definition of, 8 issues regarding calculation and reporting, 555 minimizing, 419 monthly returns for incubation and subsequent periods, 417, 418t performance persistence, 503 performance research issues, 385–​386 BarclayHedge Database, snapshot of, 380, 381t commercial databases, 380 Eurekahedge database, 380, 382f Form 13F filings, 382–​383 fund characteristics associated with performance, 431–​435 generally, 415 liquidation bias, 8, 49, 54 obsolete funds, 380 performance persistence, 503 selection bias, 8, 416 benchmarking, consequences of bias, 514, 516–​517 definition of, 8 issues regarding calculating and reporting, 555 performance research issues, 384 Sharpe ratio, 420, 423t, 426 Sortino ratio, 420, 423t survivorship bias, 8, 418–​419 attrition and returns, 553–​554 benchmarking, consequences of bias, 516 definition of, 8 Fung-​Hsieh alpha and, 418, 419t issues regarding calculating and reporting, 553–​554 minimizing, 419 performance persistence, 503 performance research issues, 384–​385 post-​incubation-​period monthly returns, 418, 419t spurious biases, 554 voluntary reports/​disclosures, 380–​382 performance fees See management incentives performance measurement and data selection, 416–​425 biases and anomalies, 416–​420, 436 average monthly returns, by category, 416, 417t backfill bias, 416–​417, 418t, 419 bias-​free average returns, 419–​420, 421t–​422t maximum drawdown, 420, 423t performance record, 416 selection bias, 8, 384, 416, 514, 516–​517, 555 Sharpe ratio, 420, 423t Sortino ratio, 420, 423t survivorship bias, 418–​419, 419t winsorizing process, 420, 421t–​422t 646 I nd ex performance measurement and data selection (Contd.) offshore hedge funds, 426 indices, 264–​265 option-​like strategies usage, 503 Merrill Lynch U.S T-​Bill Index, 416, 417t, out-​of-​the-​money put option, 503 419–420, 422t, 423t performance persistence, 492–​497, 503, 506 operational risk measure, 425 persistence and strategy-​adjusted performance, reporting issues and deviations, 420, 423–​425 426–​427 Center for Research in Securities Practices portfolio analysis, 494 (CRSP) database, 425 regression analysis, 494 discrepancies, 424–​425 return-​smoothing, 502–​503 distribution of reported monthly returns, risk-​adjusted performance persistence, 493 423, 424f risk-​factor based performance models, 427–​429 managers, reluctance to report slightly risk measurement bias, 387–​388, 389t negative returns, 424 sampling bias, 388–​389, 389t misreporting or delayed reporting, 420, 423–​424 selection bias, 384 Russell 2000 Index, 416, 417t, 419–​420, Sharpe ratio, 426, 493 422t, 423t skill vs luck, 386 selection bias, 8 Sortino ratio, 420, 423t benchmarking, consequences of bias, 514, spurious persistence, 503 516–​517 stale price bias, 386–​387 definition of, 8 statistical methodologies, 493–​497 issues regarding calculating and reporting, 555 advanced econometric methods, 496–​497 performance research issues, 384 contingency-​table-​based methods, 494–​495 Standard & Poor’s 500 Index, 416, 417t, 419–​ correlation-​based methods, 495–​496 420, 422t, 423t Kolmogorov-​Smirnov Test, 496 performance measurement and evaluation, portfolio analysis, 494 425–​431, 435 See also performance regression analysis, 494 measurement and data selection survivorship bias, 384–​385, 503 advanced econometric methods, 496–​497 Fung-​Hsieh Alpha, 418, 419t appraisal ratio, 493 performance persistence, 18, 491–​507 backfill bias, 385–​386, 503 definition of, 491 Bayesian approach using bootstrapping, fund strategies (1994–​2015), assessment of, 430–​431 503–​506, 505t calculation method choice, generally, 415 generally, 491–​492 categorization of performance measures, 493 literature review, 497–​502 causes of performance persistence, 502–​503 academic studies, generally, 492 contingency-​table-​based methods, 494–​495 fund samples, 497, 498t–​499t correlation-​based methods, 495–​496 fund strategies (1994–​2015), assessment of, evaluation issues, 502–​503 503–​506, 505t hedge fund performance, 383, 383f long-​term performance persistence, 501–​502 information ratio, 493 short-​term performance persistence, 497, Kolmogorov-​Smirnov Test, 496 500–​501 managers and performance measures, 63–​64 managers, 491, 503 manipulation-​proof performance measure, data biases, 503 proposal, 430 fund strategies, assessment of, 503–​506, 505t measurement biases, 383–​389, 383f long-​term performance persistence, 501–​502 backfill bias, 385–​386, 503 portfolio analysis, 494 risk measurement bias, 387–​388, 389t return-​smoothing, 502 sampling bias, 388–​389, 389t skill of, 502 selection bias, 384 measurement, evaluation issues, 502–​503 skill vs luck, 386 backfill bias, 503 stale price bias, 386–​387 causes of performance persistence, 502–​503 survivorship bias, 384–​385, 418, 419t, 503 data biases, 503 measurement methodologies, 492–​497, 506 option-​like strategies usage, 503 categorization of performance measures, 493 out-​of-​the-​money put option, 503 statistical methodologies, 493–​497 return-​smoothing, 502–​503 money-​weighted vs time-​weighted returns, spurious persistence, 503 429–​430 survivorship bias, 503   647 I n dex measurement methodologies, 492–​497, 506 categorization of performance measures, 493 appraisal ratio, 493 information ratio, 493 risk-​adjusted performance measures, 493 Sharpe ratio, 493 statistical methodologies, 493–​497 advanced econometric methods, 496–​497 contingency-​table-​based methods, 494–​495 correlation-​based methods, 495–​496 Kolmogorov-​Smirnov Test, 496 portfolio analysis, 494 regression analysis, 494 persistence and strategy-​adjusted performance, 426–​427 personal risk aversion, 151 “phase-​locking” behavior, 290 Philip Goldstein et al v. SEC (2006), 80, 363 poison pill, definition of, 112 Ponzi schemes, 560 pooled investments vs hedge funds, 3–​4 portfolio analysis performance persistence, measurement of, 494 portfolio diversification long/​short equity strategies, 195 predictions assets under management (AUM), growth of, 568 performance, offshore vs onshore hedge funds, 165–​166 strategy effects, fund failures, 53 pricing hedge funds, 17, 394–​413 alpha-​beta separation, 394–​395 asset pricing theory, 394, 412 capital asset pricing model (CAPM), 394, 412 distinguished from mutual funds and private equity funds, 77 generally, 394–​395, 412–​413 Jensen’s alpha, 397, 400, 401t, 405, 412 key feature of hedge funds, 394 MATLAB Financial Toolkit coding, 405, 406, 408, 409–​411 sets of alpha outputs, 401, 401t mutual funds vs., 394 quantitative modeling, 395–​412 beta estimation, 401–​402 four-​moment extension, 412 GH1 alpha, 401t, 407–​408, 407f GH2 alpha, 401t, 406–​407, 406f H-​alpha, 408–​410, 409f higher moments, 410–​411 hypothesis testing for the significance of hedge fund beta in excel, 402–​403 market model, 395–​401 Modigliani’s alpha (risk-​adjusted market model), 394, 403–​405, 412 multifactor asset-​pricing extensions, 411–​412 647 Sharpe’s ratio, 405, 410, 411, 412 prime brokerage fees, future trends, 578–​579 principal-​agent framework, 25, 27–​29, 34 adverse selection problems, 25 “arithmetic of active management,” 27 corporate governance and governance devices, 100 equilibrium accounting, 27 high-​water mark, 27 lack of transparency, 25, 169 managers fees based on assets under management (AUM), inherent problems with, 25, 27 high-​water mark, 27 moral hazard dilemma, 25 participation constraint, 25, 27 top earning managers, 27, 28t, 388, 389t mitigation by, 25, 27 mitigation of, 25, 27 moral hazard dilemma, 25 operational risk and, 291 organizational issues, 79 participation constraint, 25, 27 qualified investors accredited individual investors, 25 financial institution, 25 high-​water mark, 27 lack of transparency, 25, 169 limited partners, investors, 27 skill vs luck, 27, 29 transparency, offshore hedge funds, 169 private equity funds organization of, distinguished from hedge funds, 76–​79 Private Fund Investment Advisers Registration Act of 2010 (PFIARA), 310, 364 private placement status, 170, 172 professional directorship companies, 348 proprietary investment, 78–​79 Protection of Shareholder’s Rights Act of 1980, 95 public concerns about hedge funds, 359–​361 public entities, hedge funds as, 372 public policy discussion activist hedge funds, 115, 117–​118 qualified electing fund (QEF) election, 142–​143 quantitative directional funds, 527, 528t racial demographics, managers, 573 Radnor Holding Corporation, 217–​219 realized fee charged compared to realized alpha generated, 155 recovery planning and business continuity planning operational due diligence process and key questions investors should ask, 354–​356 648 I nd ex registration See also domicile Delaware as domicile location, 87–​90 forum shopping, 80, 86 international regulation, 80, 86 offshore hedge funds, 167–​169 corporations, 99–​100, 167 legal status, 166–​167 limited partnerships, 168–​169 master feeder structure, 168–​169 onshore hedge fund registration, contrasted, 167 unit trusts, 168 onshore hedge funds, 167 avoidance of registration, private placement status, 170, 172 contrasted with offshore hedge funds, 167 Investment Company Act of 1940, 170 registration, investment advisers, 362–​363 registration requirements, managers See managers, registration requirements regression analysis, 494 regulations, 4, 16, 359–​375 See also international regulation; Securities and Exchange Commission (SEC); taxation Access to Capital for Jobs Creators Act (ACJCA), 368 advertisement or solicitation of funds, 361, 362, 368–​369 compliance costs, increase in, 366, 367, 375 data collection obligations, Form PF, 311, 364–​366 developed and emerging countries, 171–​172 disclosure requirement, SEC rules, 364–​367 Form ADV disclosures, 322–​323, 367 Form PF, 311, 364–​366 Schedule 13D disclosures, activist hedge funds, 111, 112, 120–​121, 122 SEC examinations and enforcement actions, 366–​367 Dodd-​Frank Act, 4, 310–​311, 316 compliance costs, increase in, 366, 367, 375 disclosure requirement and SEC Form PF, 311, 364–​366 Financial Stability Oversight Council (FSOC), 310–​311, 316 Form PF, data collection obligations, 311, 364–​366 managers registration requirement, 364 offshore hedge funds, 169–​170 Private Fund Investment Advisers Registration Act of 2010 (PFIARA), 310, 364 systemic risk, 310–​311, 316 Form 13F filings (SEC), 382–​383 Form ADV disclosures (SEC), disclosure requirement, 322–​323, 367 Form PF, data collection obligations, 311, 364–​366 future trends, concerns regarding, 556–​558 generally, 4 historic background avoidance of regulatory requirements, 361–​362 characteristics of early funds, 359–​360 exceptions and exemptions, 361–​362 initial U.S. regulatory framework, 361–​362 Investment Company Act of 1940, 361 public concerns, 359–​361 Rule 506 of Regulation D, safe harbor provision, 361, 362 Securities Act of 1933, 361 indirect regulation, proposals, 372–​375 Investment Advisers Act of 1940, 362–​363 Investment Company Act of 1940, 361, 362 investment practices affecting hedge funds, general rules on, 370–​372 Jumpstart Our Business Startups Act ( JOBS Act), 368, 557 level of regulation as compared to offshore hedge funds, 171 leverage, 371–​372 long term capital gains (LTCG), taxation of funds and, 367 managers registration requirement, SEC rules, 362–​364 market manipulation, 371 misconduct, enforcement efforts against hedge fund, 558–​559 mutual funds and private equity funds, distinguished from hedge funds, 78 naked shorting, 371 new regulatory developments, 362–​369 offshore hedge funds, 169–​173 performance, offshore vs onshore hedge funds, 164, 165 public concerns, 359–​361 public entities, hedge funds as, 372 “race to the bottom,” 86, 87 regulations, limited constraints, 34 Regulation T, short selling, 370–​371 Schedule 13D disclosures (SEC) activist hedge funds, 111, 112, 120–​121, 122 taxation of funds and long term capital gains (LTCG), 367 Volcker Rule, 4, 25 vote buying, 371 relative value strategies, 6, 14, 242–​257 assets under management (AUM), statistics convertible arbitrage funds, 243 debt arbitrage funds, 248 equity market-​neutral funds, 250 classification of, 6 convertible arbitrage See convertible arbitrage strategy cumulative performance of (2005–​2014), 531, 531f   649 I n dex debt arbitrage strategies, 248–​250 definition of, 242, 243 directional strategies vs global macro strategies, 231–​232 equity market-​neutral strategy See equity market-​neutral strategy generally, 242–​243 interest rebate, 245 leverage, use of, 243, 245, 257 average gross leverage, 243 cash and carry arbitrage, 245 convertible arbitrage, 243, 245 debt arbitrage strategies, 248 equity market-​neutral strategies, 250, 251, 252f, 253, 255 interest rate risk, 247 managers, strategy style analysis, 532–​533 misnomers, 242, 245 risks, 247 strategy style analysis, 525t, 532–​533 cumulative performance of (2005–​2014), 531, 531f managers, 532–​533 volatility trading, 245–​246 replication See hedge fund replication reporting returns, 552–​556 See also specific hedge fund strategies back-​testing data, 555 biases and anomalies, 416–​420, 436 average monthly returns, by category, 416, 417t backfill bias, 416–​417, 418t, 419, 555 benchmarking biases, consequences of, 514–​519 bias-​free average returns, 419–​420, 421t–​422t indices, bias minimization, 265 liquidation bias, 8, 49, 54 maximum drawdown, 420, 423t performance record, 416 return-​smoothing bias, 156, 159, 196, 502– 503, 517–​518, 553 selection bias, 8, 384, 416, 514, 516–​517, 555 Sharpe ratio, 420, 423t Sortino ratio, 420, 423t survivorship bias, 418–​419, 419t, 553–​554 winsorizing process, 420, 421t–​422t Center for Research in Securities Practices (CRSP) database, reporting deviations from, 425 compliance costs, increase in, 366, 367, 375 data collection audited financial statement review, 351–​352 Form PF, 311, 364–​366 material nonpublic information, considerations, 352–​353 data selection, indices, 416–​425 delayed reporting, 420, 423–​424 649 disclosure requirements compliance costs, increase in, 366, 367, 375 SEC See SEC rules, disclosure requirements discrepancies, 424–​425 indices, 264–​265 bias minimization, 265 desirable characteristics of, generally, 265 Hedge Fund Research (HFR) database, 264 Hedge Fund Research Index (HFRI), 264–​265 potential measurement errors and biases, 265 information to partners and tax authorities, U.S. hedge funds (onshore funds), 130–​131 issues and deviations, 420, 423–​425 liquidation bias, 8, 49, 54 lockup periods, 556 managers, reluctance to report slightly negative returns, 424 manipulation of reported returns, 156–​157 measurement errors and biases, indices, 265 Merrill Lynch U.S T-​Bill Index, 416, 417t, 419– 420, 422t, 423t misreporting, 420, 423–​424 money-​weighted vs time-​weighted returns, 429–​430 nonsynchronous trading, 553 operational risk measure, 425 reporting issues and deviations, 420, 423–​425 return-​smoothing bias, 196 benchmarking, consequences of bias, 517–​518 managers’ performance fees, 156, 159 performance persistence, 502–​503 serial correlation, 553 yield enhancement strategies, 196 Russell 2000 Index, 416, 417t, 419–​420, 422t, 423t SEC rules, disclosure requirements, 364–​367 examinations and enforcement actions, 366–​367 Form ADV disclosures, 322–​323, 367 Form PF, 311, 364–​366 Schedule 13D disclosures, 111, 112, 120–​121, 122 selection bias, 8, 384, 416, 514, 516–​517, 555 serial correlation, 552–​553 share restrictions, 556 spurious biases, 554 Standard & Poor’s 500 Index, 416, 417t, 419–420, 422t, 423t survivorship bias, 418–​419, 419t, 553–​554 systematic operational risk process, risk controlling and reporting, 336–​337 voluntary reporting, 380–​382 winsorizing process, 420 650 I nd ex research See also performance evaluation, database biases activist hedge funds strategies, performance, 390–​391 availability of data, 380–​381 commercial databases, 380 development of academic research, 96, 98 measurement biases, 383–​389 obsolete funds, 380 risk measurement bias, 387–​388, 389t sampling bias, 388–​389, 389t stale price bias, 386–​387 voluntary reporting/​disclosures, 380–​382 responsive managerialism, 99–​100, 103 retirement funds See pension funds returns See also headings under performance; reporting returns; specific hedge fund strategy activist hedge funds, 107, 122–​123 activist hedge funds vs other indices, 113–​115 assets under management (AUM) and, relationship between, 431–​434 biases See reporting returns characteristics See returns, characteristics of cross-​sectional return dispersion, 435 equity market-​neutral strategies, 250–​251, 252f financial crisis of 2007–​2008, returns during, 42 low returns /​high fees, debate, 551–​552 money-​weighted vs time-​weighted returns, 429–​430 multistrategy, quantitative analysis, 264–​279 net fund flows, 42–​43, 43f nonsynchronous trading, 553 offshore hedge funds and onshore hedge funds, contrasted, 176, 180f 1998, decrease in returns, 425–​426 poor returns and fee structure, 155 rate of returns vs past assets sizes, 44–​49, 44f–​48f, 57 reporting issues See reporting returns systemic risk, amplification and mitigation attributes, 309–​310 returns, characteristics of, 284–​290 absolute performance targets pursed, 284 heterogeneous strategies, 284 insignificant unconditional correlations with major financial risk factors, 285–​289 “phase-​locking” behavior, 290 substantial tail risk, 290 return-​smoothing bias, 196 benchmarking, consequences of bias, 517–​518 managers’ performance fees, 156, 159 performance persistence, 502–​503 serial correlation, 553 yield enhancement strategies, 196 returns to scale, limited, 151 Revenue Procedure 2015-​14, 129 risk, generally See also due diligence; systemic risk aversion of See risk aversion correlations in fund investment styles, 291–​292, 292f credit risk, 291 diversification benefit, decrease of during financial crises, 443–​449 liquidation of fund, excessive risk-​taking and, 55–​56 liquidity risk (also called illiquidity risk), 291 management See risk management market risk, 291 nature of risks, 284–​292 operational risk, 291 risk factor, definition of, 290 strategy related variations of risk type, 291 substantial tail risk, 290 tail risk, 290, 299 types of risk, 290–​292 risk-​adjusted market model (Modigliani’s alpha), 394, 403–​405, 412 risk-​adjusted performance measures performance persistence, measurement of, 493 risk measurement bias, 387–​388, 389t risk arbitrage strategy (also known as merger arbitrage), 207, 208–​216 AbbVie/​Shire case, failed transaction, 213–​216, 214f arbitrage spread, 208 base strategy, 208–​209 “deal break risk” sources, 209 definition of, 207, 208 delta hedging, 212 examples, 209–​216 financial crises, decrease in diversification benefit during crisis dummy variable, linear factor model, 449, 450t–​451t risk, increased correlation of strategy, 444, 446t–​447t, 448 summary statistics, 441–​443, 442t fund failure, predicting, 53 historical background, 95–​96 predicting fund failures, 53 Softbank-​Sprint case, complex cash transaction, 209–​213, 212f, 213f strategy style analysis, 530 cumulative performance of (2005–​2014), 531, 531f self-​declared styles of funds, 527, 528t risk aversion constant relative risk aversion (CRRA), 150–​151 future trends, 573–​574 hyperbolic absolute risk aversion (HARA), 150 management incentives, 150–​151 personal risk aversion, 151 risk-​factor based performance models, 427–​429 Carhart alpha, 427, 429t   651 I n dex Fama and French, three-​factor model, 427, 429t Fung-​Hsieh Alpha 7-​factor model, 427–​428, 429t, 431, 432, 433t, 434f 8-​factor model, 429t, 433t, 434f survivorship bias and, 418, 419t hedge fund alphas based on four models, 428, 429t information ratio, 427 lockback straddle, 428 market model alpha (MM alpha), 429t market model beta (MM beta), 429t straddle position, 428 risk management, 301 See also operational risk management fund failures, factors, 283 managers, successful traits, 67–​68, 70 manager’s perspective, generally, 283 risk measurement, relationship to, 283–​284 success of funds, reasons for, 283 tensions between managers and investors, 283 risk map, 321, 321f risk measurement, 15, 283–​284, 292–​301 bottom-​up approach, 293–​299 advanced risk measurement tools, 297–​299 convexity adjustment, 294–​295 dollar duration, 294 equity risk, betas as risk factor sensitivities, 296 expected shortfall, 297, 299 modified Macaulay duration, 294 pricing derivative instruments using Greeks, 295–​296 pricing fixed-​income risk, 294–​295 tail risk, 299 value-​at-​risk (VaR), 297–​299 due diligence process, 292–​293 economic sustainability of, 293 investment process, importance to, 292–​293 replicability, 293 risk of fraud, performance flag indicators, 293 factor models, 299–​301 risk measurement bias highest earning managers, 27, 28t, 388, 389t performance research issues, 387–​388, 389t risk response management incentives, 150–​151 risk-​taking behaviors, 152 Rule 506 of Regulation D (SEC rule) advertisement or solicitation of funds, 368–​369 safe harbor provision, 361, 362 Rules 10b5-​1 and 10b5-​2 (SEC rules) material nonpublic information and operational due diligence, 353 Russell 2000 Index reporting returns, biases and anomalies average monthly returns, 416, 417t 651 bias-​free average returns, unwinsorized and winsorized, 419–​420, 422t common performance metrics, 420, 423t Russia as location to manage offshore hedge funds, 126f sale of partnership interest, 133 sampling bias, 388–​389, 389t Schedule 13D disclosures (SEC), 111, 112, 120–​121, 122 Scientific forecasting (Karsten), 5 secretive nature of funds, 379 See also transparency, lack of Section 475(f) election, 129 Section 1291(a), excess distribution methodology, 143 sector specific funds energy funds, 527, 528t technology/​health care funds, 527, 528t sector vs sector, 197 Securities Act of 1933, 361 Securities and Exchange Commission (SEC) advertisement or solicitation of funds, Rule 506 of Regulation D accredited investors, verification methods/​ tests, 369 amendments to, 368–​369 investor verification requirements, 368–​369 safe harbor provision, 361, 362 compliance costs, increase in, 366, 367, 375 corporate governance, historical background, 94 disclosure requirement, SEC rules, 364–​367 examinations and enforcement actions, 366–​367 Form ADV disclosures, 322–​323, 367 Form PF, 311, 364–​366 Schedule 13D disclosures, 111, 112, 120–​121, 122 enforcement efforts against misconduct, 558–​559 Form 13F filings, 382–​383 Form ADV disclosures, 322–​323, 367 Form PF, 311, 364–​366 Goldstein et al v. SEC (2006), 80, 363 Investment Advisers Act of 1940 investment adviser registration safe harbor, SEC’s adoption of, 362–​363 managers registration requirement, 362–​364 material nonpublic information, Rules 10b5-​1 and 10b5-​2, 353 misconduct, enforcement efforts against hedge fund, 558–​559 offshore hedge funds, regulations, 170 Rule 506 of Regulation D, advertisement or solicitation of funds, 361, 362, 368–​369 Rules 10b5-​1 and 10b5-​2 652 I nd ex Securities and Exchange Commission (Contd.) material nonpublic information and operational due diligence, 353 shareholder participation in governance process, participation in, 94 systemic risk and Form PF, 311 selection bias, 8, 416 benchmarking, consequences of bias, 514, 516–​517 definition of, 8 issues regarding calculating and reporting, 555 performance research issues, 384 self-​declared styles of funds, 527, 528t self-​selection bias See selection bias semi-​deviation denominator Sortino ratio, 420 serial correlation, 552–​553 service providers, offshore hedge funds, 173 7-​factor model, Fung-​Hsieh, 427–​428, 429t, 431, 432, 433t, 434f shadow banking, 307, 308, 309, 312, 317 share class arbitrage strategy, 186, 199 shareholder activism See activist hedge funds shareholder’s rights, 94–​95 share restrictions returns, issues regarding calculating and reporting, 556 Sharpe ratio, 405, 410, 411, 412 criticisms of, 426 performance persistence, measurement of, 493 return reporting biases and anomalies, 420, 423t short-​biased strategies, 185, 196 short funds, benchmarking, 511 short selling, 370–​371 short-​term growth uncertainty, future trends, 570–​571 short-​term performance persistence, 497, 500–​501 Singapore domicile of onshore hedge funds, 176f as location to manage offshore hedge funds, 126f single multistrategy hedge funds, 259–​260 definition of, 259 example of, 261 multistrategy fund of funds vs., 263–​264 quantitative analysis/​returns and performance, 266–​269 strategy repartition evolution, 260, 260f size and performance of fund See performance and size of fund, relationship between skill vs. luck managers’ fees based on AUM, inherent problems with, 27, 29 performance research issues, 386 smaller funds, future trends better performance by, 575 investor bases, assessment of new and more diversified, 572 smoothing returns See return-​smoothing bias social ramifications of activist hedge funds, 117–​118 society, importance of hedge funds to, 33 Softbank-​Sprint case, 209–​213, 212f, 213f “soft control” and “hard control,” 110 solicitation of funds See advertisement or solicitation of funds, regulations regarding Soros, George, 61–​62 Sortino ratio, 420, 423t South Africa domicile of onshore hedge funds, 176f wrappers distributions via insurance companies, 84 sovereign distressed debt Argentina, 220–​222, 220f, 223f sovereign wealth funds, future trends, 569 Spain domicile of onshore hedge funds, 176f as location to manage offshore hedge funds, 126f specialized long/​short equity funds, 195–​196 special situations strategies, 207, 222–​224 catalytic events, 222 definition of, 207, 222 self-​declared style of fund, statistics, 527, 528t spin-​offs, 223–​224 speculators, 235 spin-​offs, 223–​224 spurious biases, 554 spurious persistence, 503 stale price bias, 386–​387 Standard & Poor’s 500 Index financial crises, decrease in diversification benefit during, 440, 441–​443, 452, 452f reporting returns, biases and anomalies average monthly returns, 416, 417t bias-​free average returns, unwinsorized and winsorized, 419–​420, 422t common performance metrics, 420, 423t statistical arbitrage, 254–​255 equity market-​neutral strategies, 201, 204 examples of, 254–​255 leverage, 255 mean reversion example, 199–​200, 200f multiclass trading, 255 peer group trading, 254–​255 stub trading, 255 stereoscopic approach, 195 stock vs market, 197 stock vs sector, 197 stock vs stock, 197 stop-​loss order, 255 straddle position, 428 straight long, 186 straight short, 186 strategic funds, 527, 528t strategies, generally See investment strategies   653 I n dex strategy-​adjusted performance, 426–​427 strategy distinctiveness, 434 strategy effects, predicting fund failures, 53 strategy level capacity constraint, 50 strategy related variations of risk type, 291 strategy style analysis, 18–​19, 524–​542 See also specific fund strategy activist hedge funds, 530, 531, 531f alternative yield funds, 531, 531f categorization of primary strategies, 525, 525t consistency of style vs factor timing, 540, 542 cumulative performance of fund categories (1998–​2014), 526, 526f emergence of style, 525 equity hedge, 525t, 527–​530 event-​driven, 525t, 530–​531 factor timing vs style consistency, 540, 542 fund of funds, 525–​526, 533 funds vs arbitrage portfolios, 538, 540, 541t funds vs styles, covariation of fund returns, 533–​538 generally, 524, 542 global macro strategies, 525t, 526, 526f, 532 other “styles,” 527, 528t, 533 prevalent styles, generally, 525–​533 relative value, 525t, 531, 531f, 532–​533 risk arbitrage strategy (also known as merger arbitrage), 527, 528t, 530–​531 self-​declared styles of funds, 527, 528t strips and straps, 236 structure of funds See organizational structure stub trading, 255 style classification bias, 514–​515 style of funds See strategy style analysis; specific hedge fund strategy substantial tail risk, 290 survival of funds, dynamic strategies, 49–​50 adaptive market hypothesis (AMH), 51–​52 broad styles or categories, 50 competition with other funds, 49–​52, 57 competitive advantages, adoption of, 51 continual evolution required, 52 estimating degree of competition, 50 right strategy at the right time, 50–​51 strategy level capacity constraint, 50 timing, 50–​51 survivorship bias, 8, 418–​419, 553–​554 attrition and returns, 553–​554 benchmarking, consequences of bias, 516 definition of, 8 Fung-​Hsieh Alpha and, 418, 419t minimizing, 419 performance persistence, 503 performance research issues, 384–​385 post-​incubation-​period monthly returns, 418, 419t spurious biases, 554 653 swap spread arbitrage strategy, 248, 249t Sweden distributions, regulation of and channels for, 83t domicile of onshore hedge funds, 174, 176f as location to manage offshore hedge funds, 126f Switzerland distributions, regulation of and channels for, 83t domicile of onshore hedge funds, 176f Eurekahedge database, 380, 382f as location to manage offshore hedge funds, 126f synthetic hedge fund clones See hedge fund replication systematic managed futures funds advantages and disadvantages, 232 definition of, 232 discretionary managed futures funds vs., 232–​236 systematic operational risk process, 331–​338 control information, 334t key steps risk controlling and reporting, 336–​337 risk identification and assessment, 331–​335, 332t risk mitigation and control system, 335–​336 risk strategy under integration with market and credit risk, 337–​338 personal dashboard risk and control management, example, 337f risk mitigation, 333t systemic diversified funds, 527, 528t systemic risk, 15, 305–​317 See also systematic operational risk process amplification and mitigation attributes, 308–​310 contagion definition of, 312 shadow banking’s contribution to, prospect of, 307, 308, 309, 317 controversy, 305 data collection obligations, Form PF, 311, 364–​366 debate on, 306–​311 definition of, 6 Dodd-​Frank Act, 310–​311, 316 failed funds, 306–​307 financial crisis of 2007–​2008 hedge funds’ contributions to, 307–​308 historical background, 306–​307 post-​crisis, evidence on risk, 311–​316 shadow banking system, 307, 308, 309, 312, 317 Financial Stability Oversight Council (FSOC), 310–​311, 316 Form PF, data collection obligations, 311, 364–​366 future trends, concerns regarding, 557–​558 growth of, 75 historical background, 306–​307 654 I nd ex systemic risk (Contd.) leverage and, 309 Long-​Term Capital Management (LTCM), collapse and bailout, 34, 557–​558 Private Fund Investment Advisers Registration Act of 2010 (PFIARA), 310 private fund managers activities, threat assessment, 305 public perception of risks posed by hedge funds, 306 regulations, 310–​311, 316 returns and investment strategies, 309–​310 risk factors, decrease of diversification benefit during financial crises, 449–​454 credit spread, 453 crisis dummy variable, linear factor model, 449, 450t–​451t, 452, 452f managers and reduction of exposures, 453 risk-​management incentives, 308–​309 investigation of, 152–​153 shadow banking’s contribution to, prospect of contagion, 307, 308, 309, 312, 317 tail risk risk measurement, bottom-​up approach, 299 substantial tail risk, 290 takeovers See corporate takeovers target companies, activist hedge funds, 118–​122 taxation See also Cayman Islands offshore corporation or limited partnership, tax framework allocation of tax items, 130 calculation of tax items, 129–​130 carried interest definition of, 125 general partners (GPs), 136, 137–​138 hedge fund, local level tax treatment, 131 investment manager, 138 carried interest, local level tax treatment, 131 Form 990-​T, exempt organization business income tax return, 134 Form 1065, Schedule K-​1, partner’s share of income, deductions, & credits, 135 full deductibility, 138 future trends, 578 generally, 12, 125–​127 general partners, 127–​128, 128f, 136–​138 hybrid hedge funds, 144–​145 “investor” fund vs “trader” fund, 129 limited partners, 127–​128, 128f, 131–​136, 138 local tax treatment, 131 long term capital gains (LTCG), 367 managers, 138–​139 carried interest, 138 deferral of management fee, 138–​139 mark-​to-​market election, 129, 130 non-​U.S. investors, 135–​136 offshore hedge funds See also Cayman Islands offshore corporation or limited partnership, tax framework tax advantages/​benefits, 164–​167, 178 unrelated business taxable income (UBTI), avoidance of, 166, 172 1256 contracts, 129–​130 partnership taxation, codified under Subchapter K of Internal Revenue Code, 128 reporting, information to partners and tax authorities, 130–​131 requirements, 128–​131 Revenue Procedure 2015-​14, 129 Section 475(f) election, 129 state tax treatment, 130–​131 structure of typical fund, 127–​128, 128f tax advantages/​benefits Delaware as domicile location, reasons for choosing, 87 offshore hedge funds, 164–​167, 178 unrelated business taxable income (UBTI), avoidance of, 166, 172 unrelated business taxable income (UBTI), 134, 135 avoidance of, 166, 172 unrelated debt-​financed income (UDFI), 134 U.S. hedge funds (onshore funds), tax framework, 127–​139 U.S. taxable investors, 131–​134 U.S. tax-​exempt investors, 134–​135 withholding requirements, 131 technology/​health care funds, 527, 528t technology investments future trends, 579–​580 growth of investments, average annual budget allocations, 579–​580 middle-​office functions, outsourcing of, 580 Tentative Draft No 1, American Law Institute (ALI), 95 termination of fund See failure of fund; liquidation of funds Texas as location to register offshore hedge funds, 126f three-​factor model, Fama and French, 427, 429t time-​series momentum strategy, 235–​236 time-​weighted returns vs money-​weighted, 429–​430 timing bias, 519 top-​down management style, 195 “trader” fund vs “investor” fund, 129 trading volatility See volatility trading strategy traditional investment funds vs hedge funds, 4–​5 transparency, lack of, 22 corporate governance, 101, 102 mutual funds and private equity funds, hedge funds distinguished from, 77   65 I n dex offshore hedge funds, 169 principal-​agent framework, 25, 169 regulations, concerns regarding, 557 structural disadvantages of hedge funds, 5 trend-​following strategies, 234, 235–​236 long-​straddle strategy, 236 strips and straps, 236 time-​series momentum strategy, 235–​236 “2 and 20” fee structure, 4, 147–​148, 158, 548, 550 undertakings for the collective investment of transferable securities (UCITS), 577 undiversifiable risk See systemic risk unethical practices managers’ performance fees, 156–​157 United Kingdom, 79 distributions, regulation of and channels for, 83t Eurekahedge database, 380, 382f as location to manage offshore hedge funds, 126f managers, systemic risk, 305 unit trusts exempted, 140 offshore hedge funds, organizational structure, 168 unrelated business taxable income (UBTI) limited partners, tax framework, 134, 135 tax advantages of offshore hedge funds, 166, 172 unrelated debt-​financed income (UDFI), 134 U.S distributions, regulation of and channels for, 83t domicile of onshore hedge funds, 176f Eurekahedge database, 380, 382f as location to manage offshore hedge funds, 126f as location to register offshore hedge funds, 125, 126f managers, systemic risk, 305 U.S. taxable investors, 131–​134 allocation of profits and loss, 132–​133 contribution of cash or assets, 132 distributions, 133 investors, Cayman Islands offshore corporation, 142 limited partners, tax framework, 131–​134 liquidation of a partnership interest, 133–​134 sale of a partnership interest, 133 tax basis, 132 transfer of partnership interest, 133 655 U.S. tax-​exempt investors, 134–​135 fees for services, 134 Form 990-​T, exempt organization business income tax return, 134 insurance income, 134 investors, Cayman Islands offshore corporation, 144 limited partners, tax framework, 134–​135 operating partnerships, 134 unrelated business taxable income (UBTI), 134, 135 unrelated debt-​financed income (UDFI), 134 valuation mutual funds and private equity funds, hedge funds distinguished from, 77 value added strategy operational risk management, enterprise-​wide risk perspective, 323–​324 value-​at-​risk (VaR) risk measurement, bottom-​up approach, 297–​299 value-​growth diversification benefit, decreases of during financial crises, 443, 452, 452f “value trap,” 196 VIX options trading, 237 volatility trading strategy convertible arbitrage strategy, 245–​246 global macro strategies, 236–​239 self-​declared style of fund, statistics, 527, 528t Volcker Rule, 4, 25 voluntary closure vs fund failures, 54 voluntary reporting/​disclosures, 380–​382 vote buying, 371 wide investment latitude, 4 winsorizing process, 420, 421t–​422t withhold campaigns (“just vote no” campaigns), 111–​112 “wolf pack” approach, 31, 112, 360 wrappers, 84, 171 yield curve arbitrage strategy, 248–​249 yield enhancement strategies, 196   657 ... of Onshore and Offshore Hedge Funds 179 Offshore and Onshore Hedge Funds Average Total Returns over Different Periods  180 Maximum and Minimum Returns for Offshore and Onshore Hedge Funds 180... Offshore Hedge Funds 175 Domicile of Onshore Hedge Funds 176 Number of Funds Following Different Strategies Classified as Offshore and Onshore Hedge Funds 177 Total Net Assets by Hedge Fund... R 26 Hedge Funds and Performance Persistence    491 N A N Q I N A N D Y I N G   WA N G vii viii Co ntents 27 Benchmarking and Bias in Hedge Funds    510 JEFFREY S SMITH, KENNETH SMALL, AND PHILLIP