In this thought provoking paper, Harry Kat, Professor of Risk Management and Director, Alternative Investment Research Centre at City University, proposes developing synthetic funds using futures for use in lieu of actively managed alternative strategies.

This is the second in the AIMA Canada series of strategy papers intended to provide an in-depth, practical review of hedge fund strategies.

This paper describes Equity Long / Short. The paper notes that the long / short equity strategy is the most diverse of all hedge fund strategies. The significant size, depth and liquidity of global equity markets has cultivated a broad array of sub-strategies within the long / short equity group. Long / short equity remains the most prevalent of all hedge fund strategies with more than $ U.S. 300 billion in assets.

The strategy focuses on exploiting manager skill while mitigating market risk. Long / short equity managers use a variety of appproaches across key factors, such as style, market capitalization, geography, market exposure, sector and philosophy. Due to the diversity of long / short equity strategies, investors must carefully assess a manager's skill and risk management processes. Short selling skill is particularly important, as it differentiates long / short equity from a traditional long-only equity strategy. With the continued growth of global equity markets, long / short equity will likely remain one of the largest and most diverse hedge fund strategies available to investors.

This paper by Fabrice Rouah, of McGill University, examines the importance of separating exit types to better understand hedge fund attrition. One of the conclusions is that separating exit types leads to estimates of attrition that are lower than previously thought.

The introduction notes, in part, that " hedge fund databases provide information on both live and dead funds ( exited funds ), making a survival analysis of their lifetimes possible. Fung and Hsieh ( 2002) point out that many funds exiting these databases have not liquidated, but have simply stopped reporting to the database vendor, for a variety of reasons. Most academic studies of hedge fund lifetimes, however, have treated all funds exiting the database as having liquidated, and have not made the distinction between the different types of exits that hedge funds experience. Furthermore, these studies have treated all predictor variables as fixed variables when in reality many of these variables change over time. In this paper we show that predictor variables should be treated as time dependent variables whenever possible.

The aggregation of exit types into a single group can lead to at least five distortions when survival analysis is applied to hedge fund lifetimes..."

NBER Working Paper 12015 ( copyright 2006 ) by Ravi Jagannathan of Northwestern University, Alexey Malakhov of UNC and Dmitry Novikov of Goldman Sachs addresses this question. In the paper, they state that " we empirically demonstrate that both hot and cold hands among hedge fund managers tend to persist. While measuring performance, we use statistical model selection methods for identifying style benchmarks for a given hedge fund and allow for the possibility that hedge funds net asset values may be based on stale prices for illiquid assets. We are able to eliminate the backfill bias by deleting all the backfill observations in our dataset. We also take into account the self-selection bias introduced by the fact that both successful and unsuccessful hedge funds stop reporting information to the database provider. The former stop accepting new money and the latter get liquidated. We find statistically as well as economically significant persistence in the performance of funds relative to their benchmarks. It appears that half of the superior or inferior performance during a three year interval will spill over into the following three year interval.

A concise White Paper by the Bank of New York which identifies 5 key operational considerations that investors should evaluate when assessing a hedge fund and its operational risk.

Of particular interest is a table which sets out the types of securities, by strategy, which are most likely to cause potential pricing issues.

AIMA Canada has announced its plan to publish a series of strategy papers intended to provide an in-depth, practical review of a variety of hedge fund strategies.

In its introduction, AIMA advises that the papers have generally been written and reviewed by industry participants. They are generic in nature and meant to be educational. The examples in the papers may, in some instances, have been simplified to convey the key concepts of the strategy.

Each paper addresses these key questions:

* What is the strategy?
* What are the nuts and bolts of the strategy?
* What are the different approaches to the strategy?
* What are the sources of return?
* What are the key risk factors?
*What has been the historical performance?
* What is a practical example of the strategy?

The first paper in the series addresses Equity Market-Neutral. Click on the title at the top to open the paper.

An excellent article by Don Putnam of Grail Partners. It is an outlook for the hedge fund industry out to 2010, examing the shifts in markets, "old" vs " new", trends in fees, prospects for hedge fund management firms, allocations by pension funds and more.

Insightful, interesting and provocative, it is also masterfully written and quite entertaining as a result.

This is an update to the highly regarded draft paper by Gary Gorton of Wharton and K. Geert Rounwenhorst of Yale, first published in June, 2004.
In this analysis, they construct an equally-weighted index of commodity futures over the period from July, 1959 to December 2004 to study the properties of commodity futures as an asset class.

Among their findings is that the negative correlation between commodity futures and other asset classes is due, in significant part, to different behaviour over the business cycle. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

The legendary Yale Endowment Fund has just released its 2005 Annual Report. For 2005, the $ 15.2 billion fund earned a total return of 22.3 %. The fund contributed $ 567 million, or 33 % of the operating budget, to the university.
A pioneer in alternative investing, the fund has 67 % of its assets allocated to alternative investments. The current target allocations are : Absolute Return 25 %, Private Equity 17 % and Real Assets 25 %.

The private equity portfolio has delivered consistently strong results; since inception in 1973 the portfolio has returned an annual average of 31.0 %, for the last 10 years it has returned an annual average of 39.5 %.

The traditional method of evaluating private equity investments incorporates a 5-year Internal Rate of Return model. This paper, by Stephen C. Johnson, CFO of Integrated Asset Management Corp. and Brian D. Uchikata, MBA student at McMaster University in Hamilton, Canada, proposes an alternative approach using a 3-year Scenario/Option Pricing Model with associated probabilities. Their choice of a 3 year horizon reflects their research findings that over 70 % of all successful investments are realized within 3 years.