Book Review

“Hedge Funds: Strategies, Risk Assessment, and Returns,” eds Greg N. Gregoriou, Vassilios N. Karavas, & Fabrice Rouah, Washington, DC, Beard Books, 2003, 390 pp., $124.95 (paper).

“Performance Evaluation of Hedge Funds,” eds Greg N. Gregoriou, Fabrice Rouah, & Komlan Sedzro, Washington, DC, Beard Books, 2003, 191 pp., $59.95 (paper).

These two anthologies of academic papers on hedge funds, released together, overlap considerably in their theses as well as with their contributors and editors. Despite some differences in emphasis from one volume to the other, we are justified in treating them as the joint products of a single school of thought.

There are at least three defining features of the Gregoriou School. First, it is interested in hedge fund survival lifetimes–not just in the much discussed issue of “survivorship bias” as it affects the value of competing hedge fund databases but the more general matter of which funds, categorized by strategy, stay in business the longest and why. Second, this school is wary of hedge fund indexes in their present form although hopeful of improvements in index sophistication in years to come. Finally, the authors in this school are skeptical of fund manager claims that managers have achieved returns “uncorrelated” to the equity markets. They take the view that zero correlation is a will-o-the-wisp and managers would be well advised to stop chasing it.

In an essay in the larger of these books, it’s contributor Jean Brunel, former chief investment officer of J.P. Morgan’s Global Private Bank, who argues that most hedge funds, across most available strategies, exhibit a positive correlation with the movements of the U.S. large capitalization equity markets, both when those markets are rising and when they’re falling–more so than “would be the case if, as certain people seem to believe, [hedge funds] were truly non-directional and uncorrelated to equity markets.” This doesn’t distress him. He believes that the case for investment in hedge funds is “still quite strong,” but it does raise what he perhaps too delicately calls an “interesting” issue about performance fees, to the extent that the performance rewarded arises out of “residual directionality.”

In the same book, Vassilios N. Karavas and Stavros Siokos collaborated on an article on “The Hedge Fund Indices Universe.” They say that there are now 12 sets of hedge fund indexes, each of which captures the hedge fund market in a different way. Biases can arise from survivorship, selection, reporting, evaluation or availability, from a focus on the construction of investable products out of a given index, from classification inconsistencies or from weighting schemes. “As the hedge fund market matures with the continuous acceptance by more and more individuals and institutional investors, indices will become more sophisticated and will adapt and capture investors’ concerns and preferences.”

Finally, the Gregoriou School believes firmly in survivorship studies–i.e. the study of how long a particular hedge fund is likely to last given its investment style, leverage, quantity of assets under management, monthly returns, minimum purchase, redemption period and management/performance fees. In general, funds of funds outlast their underlying funds; larger hedge funds outlast smaller; less-leveraged funds survive the more-leveraged.

Who are the four editors of these two books? Greg Gregoriou is visiting assistant professor of finance in the School of Business and Finance at the State University of New York, Plattsburgh. He’s also hedge fund editor and editorial board member for a peer-reviewed U.K. journal, Derivatives Use, Trading and Regulation. Fabrice Rouah is a doctoral candidate in finance, McGill University, Montreal, Quebec. He also is a former faculty lecturer and consulting statistician in the Department of Mathematics at McGill. Komlan Sedzro is professor of finance at the University of Quebec at Montreal and the director of the applied master’s program in finance there. He’s also an adviser to the Montreal Derivatives Exchange. Vassilios N. Karavas is director of research at Schneeweis Partners, Amherst, Mass. His research focus is on alternative optimization techniques including hedge fund portfolio selection and disequilibrium market models.