hedge funds: risks and returns in global capital markets · hedge funds: risks and returns in...

December 2006

HeDge Funds: Risks and Returns in Global Capital Markets

Hedge Funds: Risks and Returns in Global Capital Markets

By James R. Barth, Tong Li, Triphon Phumiwasana, and Glenn Yago

Milken InstituteDecember 2006

AcknowledgementsAn abbreviated version of this paper is to be published in 2007 in the conference proceedings, International Financial Instability: Cross-Border Banking and National Regulations, by World Scientific. Douglas D. Evanoff, George G. Kaufman, and Raymond La Brosse are the editors.

The Milken Institute is an independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations in the U.S. and around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. We put research to work with the goal of revitalizing regions and finding new ways to generate capital for people with original ideas.

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© 2006 Milken Institute

Milken InstituteHedge Funds: Risks and Returns in Global Capital Markets

Table of Contents

I. Introduction ......................................................................................................1

II. An Overview of the Hedge Fund Industry ........................................................3

III. Some Statistical Analyses ...............................................................................57

IV. Conclusions ...................................................................................................65

V. References .......................................................................................................67

VI. Appendix.......................................................................................................71

VII. About the Authors .......................................................................................73

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I. Introduction

A front-page story in September 2006 was the unraveling of the hedge fund Amarath Advisors. Its assets fell by a reported 65 percent in a month and 55 percent, or $6 billion, for the year. The back-page story was that financial markets barely reacted to this shocking development. This was in sharp contrast to the near-collapse of Long-Term Capital Management (LTCM) in 1998. Despite the lack of a broader market reaction, the rapid and huge losses suffered by Amarath raise serious issues about the performance and risk of hedge funds more generally.

Unlike hedge funds, mutual funds are widely available to the public and therefore must be registered with the Securities and Exchange Commission. In addition, they are limited in the strategies they can employ. Hedge funds, on the other hand, are set up as limited partnerships and generally not constrained by regulatory limitations on their investment strategies. Indeed, although the word “hedge” refers to the hedging of the value of assets through the use of derivative instruments or the simultaneous use of long positions and short sales, most hedge funds do not involve hedging in this traditional sense. Many, in fact, do just the opposite – which explains the collapse of Amarath and LTCM. In this paper, we examine some of the strategies to determine differences in performance and risk, and look at some of the factors that help explain why some funds remain in the industry and others exit.

The impact of hedge funds on global financial stability and the need for greater regulation are important and timely issues, and it is no surprise that economists have tried to address them. But the results of these efforts have been less than successful. For example, in a recent study attempting to quantify the potential impact of hedge funds on systemic risk, Chan, Getmansky, Haas, and Lo (2005, p. 97) state that “we cannot determine the magnitude of current systemic risk with any degree of accuracy.” Similarly, Garbaravicius and Dierick (2005, p. 55) conclude, “It is very difficult to provide any conclusive evidence on the impact of hedge funds on financial markets.”

Timothy Geithner (Geithner, p. 8), president of the Federal Reserve Bank of New York, gave a lecture in Hong Kong in September 2006, and addressed the issue of hedge fund regulation. “Clearly, capital supervision and market discipline remain the key tools for limiting systemic risk,” he said. “The emergence of new market participants such as leverage institutions does not change that.” In addition, Danielsson, Taylor, and Zigrand (2005, pp. 26–27) argue that while there exists a “need for a credible resolution mechanism to deal with the default of systemically important hedge fund(s) … the procedural issues and related incentive effects [to do so] are complex …[and] … require further consideration in order to provide the correct incentives for the various parties.”

Given the conclusions of these efforts, we have decided not to try to expand upon this line of enquiry here. Instead, we provide a comprehensive examination of some important aspects of the global hedge fund industry. This examination is based on a dataset assembled by HedgeFund.net that starts with eight hedge funds with $57 million in assets in 1981 and grows to 6,445 funds with $969 billion in assets as of June 2006. We use this dataset to examine differences among hedge funds over time and by the strategies they employ. We pay particular attention to changes in the performance and risk of funds over time, and to the impact of various strategies on these differences. We also use regression analyses to examine the associations between characteristics of a fund and

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its performance and risk, and to examine the associations between characteristics and the likelihood that a fund will remain alive or enter the graveyard.

This examination necessarily requires numerous tables and charts. We hope the reader will bear with us in this regard and, more importantly, be motivated by the material to identify problems or issues that merit further consideration.

[ � ]


II. An Overview of the Hedge Fund Industry

A. Growth and SizeThe recent flurry of news stories about hedge funds might lead some to think that such funds

are relatively new. But Fung and Hsieh (1999) report that the first hedge fund was actually formed in 1949. It employed a long/short equity strategy and operated on the basis of leverage, two characteristics of many hedge funds today. They add that this first hedge fund remained fairly obscure until a magazine article in 1966 touted its high returns relative to those of mutual funds. The number of hedge funds subsequently grew fairly rapidly for a few years but fell back into obscurity due to losses suffered in several downturns in the equity market. The industry rebounded once again in 1986, when another magazine article reported that a newly established hedge fund had earned an extraordinary return in its first few months of existence.

Tables 1 and 2 document the growth in the industry over the past quarter-century. In terms of both numbers and assets, the industry has experienced continuous and rapid growth, with the exception of a decline in the number of funds during the first six months of 2006. From 1981 to June 2006, funds grew in number at an average annual rate of 30 percent, while total assets grew at an average annual rate of 47 percent. Not all funds that entered the industry during this time period remained alive until the ending date, of course. In fact, the following two tables show that as of June 2006, 3,100 funds with $257 billion in total assets had exited the industry. Despite these exits, 6,445 funds remained, with $969 billion in total assets (see also charts 1 and 2).

Table 1: Total number of hedge funds

Number Entering

Number Exiting

1981 8 na na na na1982 12 4 4 na na1983 18 6 6 na na1984 27 9 9 na na1985 33 6 6 na na1986 46 13 13 na na1987 58 12 12 na na1988 76 18 18 na na1989 98 22 22 na na1990 139 41 41 na na1991 209 70 70 na na1992 300 91 91 na na1993 424 124 124 na na1994 563 139 139 na na1995 815 252 252 na na1996 1,117 302 302 na na1997 1,522 405 405 na na1998 2,041 519 525 6 61999 2,733 692 740 48 542000 3,250 517 740 223 2772001 3,825 575 915 340 6172002 4,596 771 1,117 346 9632003 5,333 737 1,176 439 1,4022004 6,235 902 1,372 470 1,8722005 6,526 291 1,057 766 2,638

June 2006 6,445 -81 381 462 3,100

Of whichTotal Number Change in

Number of Funds

Number in Graveyard

(Accumulation of Exiting Funds)

Note: Data on exiting funds have been available since 1998.

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Of Which

Total Assets Change in Assets

of Funds

Asset of Entering

Funds

Assets of Exiting Funds

Change in Assets of

Existing Funds

Assets of Funds in Graveyard

(Accumulation of Assets of Exiting

Funds)

1981 57 na na na na na1982 78 21 8 na 13 na 1983 228 151 157 na -6 na1984 531 302 8 na 295 na 1985 944 413 37 na 377 na1986 1,177 232 35 na 197 na 1987 1,486 310 68 na 241 na1988 2,328 842 104 na 738 na 1989 3,254 926 259 na 667 na1990 5,006 1,752 726 na 1,026 na 1991 7,569 2,563 976 na 1,587 na1992 9,553 1,984 1,248 na 736 na 1993 17,182 7,629 1,596 na 6,033 na1994 19,697 2,515 894 na 1,621 na 1995 25,497 5,801 2,008 na 3,792 na1996 35,535 10,038 2,952 na 7,086 na 1997 58,261 22,726 4,793 na 17,933 na1998 76,906 18,645 5,565 125 13,205 125 1999 140,265 63,359 15,506 2,022 49,875 2,147 2000 170,494 30,229 21,406 12,436 21,259 14,584 2001 237,871 67,377 18,601 10,115 58,891 24,698 2002 281,837 43,966 25,849 25,490 43,606 50,188 2003 508,811 226,974 59,503 15,552 183,023 65,740 2004 698,593 189,783 50,824 74,791 213,749 140,531 2005 839,069 140,476 45,262 67,725 162,939 208,256

June 2006 968,690 129,621 16,467 48,582 161,735 256,838 Note: Data on exiting funds have been available since 1998.

Table 2: Total assets of hedge funds($ Millions)

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Chart 1: Total number of hedge funds

Chart 2: Total assets of hedge funds($ Billions)

8 12 18 27 33 46 58 76 98 139 209 300 424 563815

1,117

1,522

2,041

2,733

3,250

3,825

4,596

5,333

6,4456,235

6,526

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1981 1986 1991 1996 2001 June2006

1 1 1 1 2 3 5 8 10 17 20 25 36 58 77140

170238

282

509

699

839

969

<1<1<10

200

400

600

800

1,000

1,200

1981 1986 1991 1996 2001 June2006

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B. Differences in Size, Domicile, Location, and Age of Funds

Although there has been growth in both the number and assets of hedge funds, asset growth has exceeded their growth in number. As a result, as table 3 shows, the average size of hedge funds has increased by more than 2,000 percent from 1981 to June 2006, from $7 million to $150 million. This occurred despite the fact that the average size of exiting funds is greater than the average size of entering funds. This difference reflects the fact that the age of exiting funds is greater than that of the newly entering funds (see table 4). Not surprisingly, the average age of a fund has increased since 1981 (again, refer to table 4). As of June 2006, the typical fund had been in existence 5.3 years.

All Funds EnteringFunds

ExitingFunds

1981 7 na na1982 6 2 na 1983 13 26 na1984 20 1 na 1985 29 6 na1986 26 3 na 1987 26 6 na1988 31 6 na 1989 33 12 na1990 36 18 na 1991 36 14 na1992 32 14 na 1993 41 13 na1994 35 6 na 1995 31 8 na1996 32 10 na 1997 38 12 na1998 38 11 21 1999 51 21 422000 52 29 56 2001 62 20 302002 61 23 74 2003 95 51 352004 112 37 159 2005 129 43 88

June 2006 150 43 105 Note: Data on exiting funds have been available since 1998.

Table 3: Average size of hedge funds($ Millions)

Table 4: Average age of hedge funds(Years)

All Funds ExitingFunds

ExistingFunds

1981 1.00 na na1982 1.67 na 2.00 1983 2.11 na 2.67 1984 2.41 na 3.11 1985 2.97 na 3.41 1986 3.13 na 3.97 1987 3.48 na 4.13 1988 3.66 na 4.48 1989 3.84 na 4.66 1990 3.71 na 4.84 1991 3.46 na 4.71 1992 3.41 na 4.46 1993 3.42 na 4.41 1994 3.57 na 4.42 1995 3.47 na 4.57 1996 3.53 na 4.47 1997 3.59 na 4.53 1998 3.67 3.33 4.59 1999 3.68 3.50 4.67 2000 3.89 3.02 4.74 2001 3.99 3.46 4.93 2002 4.03 3.86 5.01 2003 4.18 3.64 5.07 2004 4.26 4.08 5.18 2005 4.60 4.00 5.30 2006 5.34 4.52 5.61


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Tables 5 and 6 show the distribution in fund size, in terms of numbers and assets (also see tables 7–10). The tables show that while the funds with $1 billion or more in assets account for only 3 percent of the total number of funds, they account for 35 percent of total assets. Conversely, those with $100 million or less in assets account for nearly 70 percent of the total number of all funds, but they account for only 12 percent of the total assets.

Share of Total Number by Size

TotalNumber

<= $10 million

>$10million, <=$50million


>$100million, <=

$500 million

>$500million, <= $1 billion

>$1 billion

1981 8 75 25 0 0 0 01982 12 83 8 8 0 0 0 1983 18 78 17 0 6 0 01984 27 81 11 0 7 0 0 1985 33 73 18 3 3 3 01986 46 78 13 4 2 2 0 1987 58 71 16 10 2 2 01988 76 74 12 9 4 1 0 1989 98 71 15 6 6 0 11990 139 70 18 5 6 1 1 1991 209 70 16 4 9 1 01992 300 70 17 5 7 0 0 1993 424 69 17 5 7 2 01994 563 68 20 5 5 2 0 1995 815 70 19 6 5 1 01996 1,117 66 21 6 6 1 0 1997 1,522 63 21 8 7 1 01998 2,041 63 22 7 7 1 0 1999 2,733 56 26 8 8 1 12000 3,250 52 28 8 10 2 0 2001 3,825 50 27 10 12 2 02002 4,596 48 27 10 12 2 1 2003 5,333 43 27 11 15 2 12004 6,235 38 27 12 18 3 2 2005 6,526 33 27 13 21 3 2

June 2006 6,445 27 29 13 25 4 3

Table 5: Distribution of the number of hedge funds by size

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Share of Total Assets

Total Assets <= $10 million >$10 million, <=$50 million

>$50 million, <=$100 million

>$100 million, <= $500 million

>$500 million, <= $1 billion >$1 billion

1981 57 0 100 0 0 0 01982 78 10 23 67 0 0 0 1983 228 2 30 0 68 0 01984 531 4 14 0 82 0 0 1985 944 1 16 6 22 55 01986 1,177 2 17 9 21 51 0 1987 1,486 2 13 25 16 44 01988 2,328 3 10 23 22 43 0 1989 3,254 3 14 13 31 0 391990 5,006 2 14 11 35 11 27 1991 7,569 3 11 9 41 15 221992 9,553 3 11 12 55 0 19 1993 17,182 2 9 9 35 27 181994 19,697 2 13 10 29 29 17 1995 25,497 4 15 13 33 25 111996 35,535 3 16 13 32 26 10 1997 58,261 2 13 14 43 14 131998 76,906 3 15 13 39 16 14 1999 140,265 2 13 10 33 16 262000 170,494 2 13 11 39 20 15 2001 237,871 2 11 12 41 21 142002 281,837 2 11 12 42 19 14 2003 508,811 1 7 8 34 18 322004 698,593 1 6 8 36 19 31 2005 839,069 1 6 7 37 18 32

June 2006 968,690 1 5 6 37 17 35

Table 6: Distribution of the assets of hedge funds by size ($ Millions)

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TotalNumber

<= $10 million



>$100million, <=

$500 million


>$1 billion

1981 8 75 25 0 0 0 01982 4 100 0 0 0 0 0 1983 6 83 0 0 17 0 01984 9 100 0 0 0 0 0 1985 6 67 33 0 0 0 01986 13 92 8 0 0 0 0 1987 12 83 8 8 0 0 01988 18 94 0 6 0 0 0 1989 22 82 9 5 5 0 01990 41 83 10 2 5 0 0 1991 70 79 16 3 3 0 01992 91 82 13 0 4 0 0 1993 124 83 14 1 2 1 01994 139 82 16 1 1 0 0 1995 252 82 14 3 1 0 01996 302 80 15 3 2 0 0 1997 405 77 17 3 2 0 01998 525 78 16 4 1 0 0 1999 740 74 20 4 3 0 02000 740 70 24 3 3 0 0 2001 915 63 26 7 3 0 02002 1,117 63 27 5 5 0 0 2003 1,176 58 29 7 5 0 02004 1,372 54 27 10 9 1 0 2005 1,057 52 30 10 7 1 0

June 2006 381 54 25 10 10 0 1

Table 7: Distribution of the number of entering hedge funds by size

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TotalNumber

<= $10 million



>$100million, <=

$500 million


>$1 billion

1981 na na na na na na na1982 na na na na na na na 1983 na na na na na na na1984 na na na na na na na 1985 na na na na na na na1986 na na na na na na na 1987 na na na na na na na1988 na na na na na na na 1989 na na na na na na na1990 na na na na na na na 1991 na na na na na na na1992 na na na na na na na 1993 na na na na na na na1994 na na na na na na na 1995 na na na na na na na1996 na na na na na na na 1997 na na na na na na na1998 6 67 17 17 0 0 0 1999 48 69 17 6 4 4 02000 223 70 21 4 4 0 1 2001 340 59 29 7 4 1 02002 346 59 25 10 5 1 1 2003 439 59 26 8 7 0 02004 470 49 29 8 11 1 1 2005 766 43 31 10 11 3 2

June 2006 462 45 27 9 16 3 2 Note: Data on exiting funds have been available since 1998.

Table 8: Distribution of the number of exiting hedge funds by size

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Total Assets <= $10 million



>$100million, <=

$500 million


>$1 billion

1981 57 0 100 0 0 0 01982 8 100 0 0 0 0 0 1983 157 1 0 0 99 0 01984 8 100 0 0 0 0 0 1985 37 0 100 0 0 0 01986 35 26 74 0 0 0 0 1987 68 10 15 75 0 0 01988 104 38 0 62 0 0 0 1989 259 15 22 22 41 0 01990 726 5 17 8 70 0 0 1991 976 9 22 17 51 0 01992 1,248 9 18 0 73 0 0 1993 1,596 10 20 4 14 52 01994 894 18 49 19 13 0 0 1995 2,008 18 41 24 17 0 01996 2,952 14 33 20 33 0 0 1997 4,793 12 28 19 41 0 01998 5,565 15 34 25 26 0 0 1999 15,506 8 21 12 25 0 342000 21,406 5 18 7 18 0 51 2001 18,601 7 30 24 29 11 02002 25,849 6 27 16 33 9 8 2003 59,503 2 14 10 18 5 512004 50,824 3 18 18 48 14 0 2005 45,262 3 17 15 36 16 12

June 2006 16,467 3 15 16 40 3 22

Table 9: Distribution of the assets of entering hedge funds by size ($ Millions)

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Total Assets <= $10 million



>$100million, <=

$500 million


>$1 billion

1981 na na na na na na na1982 na na na na na na na 1983 na na na na na na na1984 na na na na na na na 1985 na na na na na na na1986 na na na na na na na 1987 na na na na na na na1988 na na na na na na na 1989 na na na na na na na1990 na na na na na na na 1991 na na na na na na na1992 na na na na na na na 1993 na na na na na na na1994 na na na na na na na 1995 na na na na na na na1996 na na na na na na na 1997 na na na na na na na1998 125 4 38 58 0 0 0 1999 2,022 3 11 11 18 58 02000 12,436 3 9 5 13 0 69 2001 10,115 5 23 16 33 23 02002 25,490 2 8 10 15 12 53 2003 15,552 5 16 15 38 11 152004 74,791 1 4 3 15 6 71 2005 67,725 1 8 8 28 24 30

June 2006 48,582 1 7 6 44 17 25 Note: Data on exiting funds have been available since 1998.

Table 10: Distribution of the assets of exiting hedge funds by size ($ Millions)

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A different perspective of the hedge fund industry is provided by tables 11 and 12. These tables provide information on the domiciles of hedge funds and the locations of the funds’ assets. Table 11 provides this information based upon the number of funds, while table 12 does the same for assets. Of the 6,445 funds as of June 2006 (according to table 11), slightly more than 50 percent, or 3,354, are domiciled in the United States, and of these about half have their assets in the United States, with nearly all the remaining assets invested globally. Europe is second to the United States in terms of the number of domiciled funds, accounting for approximately 33 percent, or 2,153, of the total number of funds; of these only about 20 percent have their assets invested in Europe. The majority of the funds, 64 percent, have invested their assets globally. However, 76 percent of the funds with 75 percent of total fund assets still have their investments in U.S. dollar-denominated assets, regardless of where the assets are located. (See table 13)

Table 12 also shows that the funds domiciled in the United States account for the largest amount of assets, $503 billion, with Europe second at $371 billion. Together they account for slightly more than 90 percent of the $969 billion in total fund assets. For funds domiciled in the United States, 52 percent are U.S.-allocated and 43 percent are invested globally, while for Europe 22 percent are allocated within the continent and 63 percent globally. European-domiciled funds invest more assets in Asia, in terms of absolute amount and as a share of their total assets, than do funds domiciled in the United States.

United States Europe Offshore Asia Australia North

America

Central and South America

Africa and the Middle

East

Eastern Europe

All regions of domicile

Global 1,403 1,379 276 21 29 52 21 19 1 3,201

United States 1,751 113 89 5 4 10 0 4 0 1,976

Europe 55 435 76 0 0 2 0 1 15 584

Asia 105 201 30 108 15 10 0 8 0 477

North America 28 14 5 0 0 51 0 0 0 98

South America 7 3 8 1 0 0 40 0 0 59

Africa 1 4 7 0 0 0 0 12 0 24

Australia/Oceania 1 0 0 0 18 0 0 0 0 19

Other/Unknown 3 4 0 0 0 0 0 0 0 7

3,354 2,153 491 135 66 125 61 44 16 6,445All locations of fund

assets

Region of Domicile

Loc

atio

n of

Ass

ets

Table 11: Total number of hedge funds by domicile and asset location (June 2006)

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United States Europe Offshore Asia Australia North

America

Central and South America

Africa and the Middle

East

Eastern Europe

Global 218,275 232,905 30,622 1,550 3,003 4,405 3,069 262 19 494,110

United States 262,315 24,426 14,742 283 1,046 615 0 103 0 303,529

Europe 9,708 83,039 8,179 0 0 48 0 28 1,353 102,354

Asia 10,655 29,754 3,382 10,789 3,223 227 0 366 0 58,396

North America 938 450 55 0 0 2,390 0 0 0 3,833

South America 257 59 759 12 0 0 2,554 0 0 3,641

Africa 25 101 50 0 0 0 0 787 0 963

Australia/Oceania 22 0 0 0 679 0 0 0 0 701

Other/Unknown 847 316 0 0 0 0 0 0 0 1,163

503,044 371,048 57,788 12,634 7,952 7,685 5,622 1,546 1,372 968,690All locations of fund

assets

Region of Domicile

Loc

atio

n of

Ass

ets

All regions of domicile

Table 12: Total assets of hedge funds by domicile and asset location ($ Millions, June 2006)

10

Share of Total Fund Assets (%)

Share of Number of Funds (%)

US dollars (USD) 75.0 75.8

Euro (EUR) 15.4 14.8

Japanese yen (JPY) 2.2 1.5

Canadian dollars (CAD) 0.3 0.8

United Kingdom pounds (GBP) 4.0 4.0

Australian dollars (AUD) 0.3 0.5

Swiss francs (CHF) 1.6 1.3

Swedish krona (SEK) 0.6 0.4

Norwegian kroner (NOK) 0.2 0.4

New Zealand dollars (NZD) 0.0 0.0

Others 0.3 0.4

Not reported 0.1 0.1

Total fund assets ($ Millions) 968,690 6,445

Table 13: Currencies of hedge fund assets denomination (June 2006)

[ �� ]


It is also useful to examine the degree of concentration of assets within the industry. Table 14 shows that the top 1 percent of funds control 19 percent of all fund assets, the top 5 percent control 47 percent, and the top 10 percent control 63 percent. However, the table also shows a wide variation in concentration ratios with respect to the location of fund assets. The top 1 percent of funds with assets invested in South America, for example, account for 58 percent of all assets in South America; the top 1 percent of funds with assets in Africa account for 46 percent of all assets invested in Africa.

Similarly, there are substantial differences in the asset concentration ratios with respect to where the funds are domiciled. Table 15 shows that the top 1 percent of funds domiciled in Africa and the Middle East account for 72 percent of all assets of funds domiciled in the region. In Europe and the United States, however, the concentration ratios are relatively low, at 18 percent in both cases, because so many funds are domiciled in these places.

11

Location of Assets Top 1% Top 5% Top 10% Global 18% 41% 55% United States 18% 44% 59% Europe 11% 43% 63% Asia 29% 49% 69% North America 6% 25% 55% South America 58% 64% 75% Africa 46% 64% 82% Australia/Oceania 16% 16% 21% All locations of assets 19% 47% 63%

Table 14: Asset concentration ratios of firms owning hedge funds by location of assets (percent)

12

Region of Domicile Top 1% Top 5% Top 10% United States 18% 43% 62% Europe 18% 39% 52% Off Shore 19% 47% 70% Asia 40% 60% 71% Australia 38% 56% 62% North America 47% 69% 77% Central and South America 39% 71% 81% Africa and the Middle East 72% 83% 91% Eastern Europe 71% 75% 77% All regions of domicile 19% 47% 63%

Table 15: Asset concentration ratios of firms owning hedge funds by region of domicile (percent)

[ �6 ]


C. Hedge Fund Strategies

Hedge funds come not only in a variety of sizes, asset locations, and domiciles, but also in a variety of strategies. Our dataset lists forty-two strategies for the hedge funds examined, including “other” and “unknown.” We consolidate these forty-two strategies into twelve strategies, with a single strategy for “other” and “unknown,” that we examine. The different strategies are defined in table 16.

Table 20: Description of strategies

noitpircseDygetartS

Fund of funds -multistrategies

Invests in many strategies of hedge funds and mutual funds. Intendedto benefit from diversification across strategies and funds.

Long/short equityBuys certain stocks long and sells others short so that net positionsare based on relative value rather than absolute value of stock. Thesefunds usually invest in countries that allow short sales.

Fund of fundsInvests in hedge funds and mutual funds but with a specific strategyrather than multiple strategies.

Event-drivenTakes significant positions in a certain number of companies withspecial situations, including distressed stocks, mergers, andtakeovers.

Market-neutral

Seeks to exploit differences in stock prices by being long and short instocks within the same sector, industry, market capitalization,country, etc. This strategy creates a hedge against market factors.Fixed-income, equity, and futures arbitrage strategies fall into thiscategory.

Commodity trading advisor Buys or sells commodity futures or option contracts.

Multistrategy Uses many strategies to produce returns.

GlobalBases its investment on overall economic and political views ofvarious countries, regions, or groups, including emerging markets,Asian countries, and Eastern European countries.

Macro

Bases its investment on macroeconomic principles, including relativeperformance of country, interest rate trends, movements in thegeneral flow of funds, political changes, government policies,intergovernmental relations, and other broad factors.

SectorBases its investment on specific sectors, such as bio-tech,technology, auto industry and defense industry for example.

Directional Bases its investment on long or short positions only.

Table 16: Description of strategies

[ �� ]


Tables 17 and 18 illustrate the relative importance of each strategy based on the share of that strategy in the total number of hedge funds and on the share of that strategy in the total assets of hedge funds. (See also charts 3–6 and tables 20–23.) The two most important strategies employed are the fund of funds/multistrategy and the long-short equity, with 25 percent of all funds employing the former and 20 percent of all funds employing the latter. The funds employing these two strategies also account for 30 percent and 17 percent of the total assets of funds, respectively.

Table 17: Total number of hedge funds by strategy

Fund of funds -Multistrategies

Long/ShortEquity

Fund offunds

Event-driven

Market-neutral

CommodityTradingAdvisor

Multistrategy Global Macro Sector Directional Other

1981 8 0 0 13 25 0 50 0 0 0 0 0 13

1982 12 8 0 8 17 8 42 8 0 0 0 0 8

1983 18 6 6 6 11 6 39 6 0 0 0 17 6

1984 27 15 11 4 11 7 33 4 0 0 0 11 4

1985 33 12 12 3 15 6 27 3 0 0 0 18 3

1986 46 11 13 2 22 4 26 2 0 0 0 15 4

1987 58 12 10 2 26 5 24 2 0 2 0 14 3

1988 76 16 13 1 22 5 26 1 0 1 0 11 3

1989 98 14 12 4 22 5 22 2 0 2 0 9 6

1990 139 15 14 6 22 4 18 3 1 5 0 7 5

1991 209 17 16 6 20 5 17 2 1 4 0 7 5

1992 300 16 18 8 18 7 14 2 2 4 1 6 5

1993 424 15 18 8 17 7 14 2 2 3 3 6 4

1994 563 16 17 9 16 9 12 3 3 3 2 5 4

1995 815 16 16 9 14 10 12 3 3 3 3 4 5

1996 1,117 16 17 9 15 10 11 3 3 4 4 4 5

1997 1,522 15 17 9 16 9 9 3 4 3 4 3 6

1998 2,041 15 18 8 16 11 9 3 5 3 4 3 5

1999 2,733 14 18 9 16 11 9 3 5 3 4 3 5

2000 3,250 16 20 9 15 11 9 3 4 3 4 3 5

2001 3,825 18 21 9 13 11 8 3 3 3 4 2 4

2002 4,596 20 20 10 12 12 8 4 3 3 3 2 3

2003 5,333 23 20 9 10 11 8 4 3 4 3 2 3

2004 6,235 24 20 9 10 10 8 4 3 4 3 2 3

2005 6,526 25 20 9 9 9 7 5 4 3 3 2 3

June 2006 6,445 25 20 10 9 9 7 5 4 3 3 2 4

TotalNumber

Share of Total Number (%)

[ �� ]


Table 19 contains the concentration ratios for the hedge funds based upon the strategy being employed. The top 10 percent of the total number of funds for each of the twelve different strategies account for between 50 percent and 71 percent of the total assets of each of the strategies. The strategy with the lowest degree of concentration is the sector strategy, while the one with the highest degree of concentration is the macro strategy.

Table 18: Total assets of hedge funds by strategy

Table 19: Asset concentration ratios of firms owning hedge funds by strategy (percent)

Strategy Top 1% Top 5% Top 10% Fund of funds - multistrategies 16% 43% 57% Long/short equity 13% 38% 54% Directional 21% 41% 55% Fund of funds 13% 36% 52% Event-driven 18% 45% 61% Market-neutral 21% 46% 59% CTA 19% 47% 64% Multistrategy 23% 47% 64% Global 19% 42% 56% Macro 32% 58% 71% Sector 8% 31% 50% Other 32% 48% 64% All strategies 19% 47% 63%

Table 22: Total assets of hedge funds by strategy


Long/Short Equity

Fund of funds

Event-driven

Market-neutral

Commodity Trading Advisor


1981 57 0 0 0 0 0 100 0 0 0 0 0 01982 78 7 0 0 0 0 90 3 0 0 0 0 01983 228 5 0 0 0 0 26 1 0 0 0 68 01984 531 3 1 31 0 0 12 1 0 0 0 52 01985 944 3 4 22 2 0 9 1 0 0 0 58 01986 1,177 5 3 21 5 0 8 1 0 0 0 58 01987 1,486 4 2 16 6 0 16 0 0 0 0 55 01988 2,328 3 2 6 9 4 27 0 0 0 0 49 01989 3,254 2 5 6 11 3 23 0 0 3 0 46 01990 5,006 7 11 3 9 1 29 1 0 6 0 31 11991 7,569 8 16 4 8 1 28 1 0 4 0 27 21992 9,553 10 18 9 7 3 21 1 0 5 1 21 41993 17,182 18 16 13 7 3 19 1 1 7 1 13 21994 19,697 17 14 11 8 5 20 1 1 6 2 13 31995 25,497 16 15 9 8 9 18 2 1 3 3 12 41996 35,535 15 15 8 9 13 17 4 2 2 4 7 41997 58,261 14 13 6 10 16 14 5 4 2 5 5 61998 76,906 14 13 6 11 15 13 4 2 2 4 6 91999 140,265 12 16 7 11 19 7 3 2 10 3 4 72000 170,494 14 21 8 13 14 6 4 2 2 3 3 122001 237,871 17 21 8 13 14 5 5 2 2 2 2 82002 281,837 22 19 8 10 14 6 7 2 2 2 2 42003 508,811 29 14 8 10 12 9 6 2 4 1 2 42004 698,593 27 16 8 10 12 6 6 3 4 2 1 42005 839,069 30 17 8 10 9 5 6 4 3 2 1 5

June 2006 968,690 30 17 9 10 8 5 7 5 3 2 1 5

Total Assets

Share of Total Assets (%)

Table 19: Asset concentration ratios of firms owning hedge funds by strategy (percent)

Strategy Top 1% Top 5% Top 10% Fund of funds - multistrategies 16% 43% 57% Long/short equity 13% 38% 54% Directional 21% 41% 55% Fund of funds 13% 36% 52% Event-driven 18% 45% 61% Market-neutral 21% 46% 59% CTA 19% 47% 64% Multistrategy 23% 47% 64% Global 19% 42% 56% Macro 32% 58% 71% Sector 8% 31% 50% Other 32% 48% 64% All strategies 19% 47% 63%

[ �� ]


Charts 3–6 illustrate the compositions of existing and dead hedge funds. Funds of funds with multistrategies constitute the largest group of existing funds, both in terms of number and assets; these are followed by long/short equity funds. In contrast, long/short equity funds, event-driven funds, and market-neutral funds make up the largest groups of graveyard funds. The difference in the composition of funds shows how fund strategies have evolved over the years.

Fund of funds - multistrategies

9%

Long/short equity21%

Event-driven17%

Fund of funds8%

Market-neutral17%

Multistrategy2%

Other6%

Commodity trading advisor

7%

Global3%

Macro3%

Directional2%

Sector5% Total = 3,311


25%


Event-driven9%

Fund of funds10%

Market-neutral9%

Multistrategy5%

Other3%


7%

Global4%

Macro3%

Sector3%

Directional2%

Total = 6,690

Chart 3: Total number of hedge funds(June 2006)

Chart 4: Total number of hedge funds in graveyard

[ 20 ]



29%


Event-driven10%

Fund of funds9%

Market-neutral8%

Multistrategy7%

Other5%


5%

Global5%

Macro3%

Sector2%

Directional1%

Total = $968,690 million

Chart 5: Total assets of hedge funds(June 2006)


12%


Event-driven17%

Fund of funds8%

Market-neutral15%

Multistrategy4%

Macro6%

Global1%


3%

Other8%

Sector4%

Directional4%

Total = $176,886 million

Chart 6: Total assets of hedge funds in graveyard

[ 2� ]


Tables 20–23 examine the total assets and numbers of entering and exiting hedge funds, according to strategy. Funds of funds with multistrategies account for 25 percent of total entering funds and 21 percent of entering-funds assets. They also account for 23 percent of total exiting funds and 26 percent of exiting-funds assets.

Table 20: Total number of entering hedge funds by strategyTable 24: Total number of entering hedge funds by strategy


Long/Short Equity

Fund of funds

Event-driven

Market-neutral



1981 8 0 0 13 25 0 50 0 0 0 0 0 01982 4 8 0 8 17 8 42 8 0 0 0 0 01983 6 6 6 6 11 6 39 6 0 0 0 17 01984 9 15 11 4 11 7 33 4 0 0 0 11 01985 6 12 12 3 15 6 27 3 0 0 0 18 01986 13 11 13 2 22 4 26 2 0 0 0 15 01987 12 12 10 2 26 5 24 2 0 2 0 14 01988 18 16 13 1 22 5 26 1 0 1 0 11 01989 22 14 12 4 22 5 22 2 0 2 0 9 41990 41 15 14 6 22 4 18 3 1 5 0 7 41991 70 17 16 6 20 5 17 2 1 4 0 7 41992 91 16 18 8 18 7 14 2 2 4 1 6 41993 124 15 18 8 17 7 14 2 2 3 3 6 41994 139 16 17 9 16 9 12 3 3 3 2 5 31995 252 16 16 9 14 10 12 3 3 3 3 4 51996 302 16 17 9 15 10 11 3 3 4 4 4 41997 405 15 17 9 16 9 9 3 4 3 4 3 51998 525 15 18 8 16 11 9 3 5 3 4 3 51999 740 14 18 9 16 11 9 3 5 3 4 3 52000 740 16 20 9 15 11 9 3 4 3 4 3 42001 915 18 21 9 13 11 8 3 3 3 4 2 42002 1,117 20 20 10 12 12 8 4 3 3 3 2 32003 1,176 23 20 9 10 11 8 4 3 4 3 2 32004 1,372 24 20 9 10 10 8 4 3 4 3 2 32005 1,057 25 20 9 9 9 7 5 4 3 3 2 3

June 2006 381 25 20 10 9 9 7 5 4 3 3 2 4

Total Number


[ 22 ]


Table 21: Total number of exiting hedge funds by strategy

Fund of funds - Multistrategies

Long/Short Equity

Fund of funds

Event-driven

Market-neutral



1981 na na na na na na na na na na na na na1982 na na na na na na na na na na na na na1983 na na na na na na na na na na na na na1984 na na na na na na na na na na na na na1985 na na na na na na na na na na na na na1986 na na na na na na na na na na na na na1987 na na na na na na na na na na na na na1988 na na na na na na na na na na na na na1989 na na na na na na na na na na na na na1990 na na na na na na na na na na na na na1991 na na na na na na na na na na na na na1992 na na na na na na na na na na na na na1993 na na na na na na na na na na na na na1994 na na na na na na na na na na na na na1995 na na na na na na na na na na na na na1996 na na na na na na na na na na na na na1997 na na na na na na na na na na na na na1998 6 0 17 0 0 17 0 0 0 0 0 0 671999 48 0 31 0 25 6 15 0 6 2 8 0 62000 223 0 13 8 27 14 4 0 11 3 7 1 122001 340 0 15 12 23 13 7 0 6 4 9 2 92002 346 0 25 9 24 13 5 0 1 2 7 3 112003 439 2 19 15 25 20 6 1 1 3 2 1 62004 470 14 28 4 10 16 9 5 1 4 3 3 32005 766 17 19 5 10 18 9 5 2 4 5 2 4

June 2006 462 23 24 8 9 11 8 3 4 2 3 2 2

Total Number



[ 2� ]


Table 22: Total assets of entering hedge funds by strategy ($ Millions)Table 26: Total assets of entering hedge funds by strategy ($ Millions)


Long/Short Equity

Fund of funds

Event-driven

Market-neutral



1981 57 0 0 0 0 0 100 0 0 0 0 0 01982 8 69 0 0 0 0 0 31 0 0 0 0 01983 157 0 0 0 0 0 1 0 0 0 0 99 01984 8 0 98 0 0 0 2 0 0 0 0 0 01985 37 0 0 0 61 0 0 0 0 0 0 39 01986 35 0 6 0 74 0 20 0 0 0 0 0 01987 68 15 0 0 10 0 75 0 0 0 0 0 01988 104 4 12 0 62 0 22 0 0 0 0 0 01989 259 0 22 2 18 11 2 0 0 41 0 0 31990 726 23 55 0 1 0 1 6 0 6 0 0 81991 976 8 58 0 3 1 12 0 0 0 2 10 41992 1,248 12 10 36 1 19 1 0 2 1 1 0 171993 1,596 15 4 54 5 9 5 0 1 0 1 1 31994 894 15 7 5 6 32 3 4 3 0 2 11 111995 2,008 25 10 6 5 27 6 6 1 2 7 0 41996 2,952 22 13 2 7 16 13 1 10 5 8 0 31997 4,793 15 14 3 8 4 3 2 12 4 4 0 311998 5,565 15 14 7 9 16 7 1 7 2 5 2 141999 15,506 15 15 7 7 9 3 1 5 29 2 0 72000 21,406 7 15 7 9 3 1 1 0 0 2 1 522001 18,601 29 20 9 9 16 2 8 0 1 2 0 32002 25,849 27 13 11 10 15 10 4 1 4 1 1 42003 59,503 64 7 4 4 5 2 5 1 3 1 1 32004 50,824 31 28 4 8 8 3 4 3 3 4 0 32005 45,262 26 17 9 4 6 2 16 7 2 2 3 7

June 2006 16,467 21 14 10 5 7 1 6 4 1 2 0 30

Total Assets


[ 2� ]


Table 23: Total assets of exiting hedge funds by strategy ($ Millions)

Fund of funds - Multistrategies

Long/Short Equity

Fund of funds

Event-driven

Market-neutral



1981 na na na na na na na na na na na na na1982 na na na na na na na na na na na na na1983 na na na na na na na na na na na na na1984 na na na na na na na na na na na na na1985 na na na na na na na na na na na na na1986 na na na na na na na na na na na na na1987 na na na na na na na na na na na na na1988 na na na na na na na na na na na na na1989 na na na na na na na na na na na na na1990 na na na na na na na na na na na na na1991 na na na na na na na na na na na na na1992 na na na na na na na na na na na na na1993 na na na na na na na na na na na na na1994 na na na na na na na na na na na na na1995 na na na na na na na na na na na na na1996 na na na na na na na na na na na na na1997 na na na na na na na na na na na na na1998 125 0 1 0 0 0 0 0 0 0 0 0 991999 2,022 0 22 0 4 0 29 0 0 0 44 0 02000 12,436 0 6 14 7 5 0 0 4 57 3 0 32001 10,115 0 19 6 13 10 1 0 1 4 12 3 312002 25,490 0 12 4 25 7 0 0 0 1 1 3 462003 15,552 1 29 10 13 26 2 0 1 3 1 0 132004 74,791 47 12 3 7 5 18 3 0 2 1 3 12005 67,725 16 16 8 11 23 3 6 1 2 2 0 11

June 2006 48,582 26 18 14 17 4 2 2 6 1 2 8 0

Total Assets



[ 2� ]


It is interesting to note the changing relative importance in strategies employed by hedge funds over time. The commodity trading advisor and directional funds strategies accounted for the larger shares of number and assets in the 1980s, but those shares declined sharply thereafter, to be replaced in relative importance by the fund of funds/multistrategy and long/short equity funds.

Table 24 presents information on the average age of funds by strategy. Overall, there is not substantial variation in the average age of funds employing different strategies, with the possible exception of the funds choosing the commodity trading advisor strategy.

Table 24: Average age of hedge funds by strategy(Years)

Table 28: Average age of hedge funds by strategy (Years)


Long/Short Equity

Fund of funds

Event-driven

Market-neutral


Multistrategy Global Macro Sector Directional OtherAll

Strategies

1981 na na na 1.0 1.0 na 1.0 na na na na 1.0 1.01982 1.0 na na 2.0 2.0 1.0 1.8 1.0 na na na 2.0 1.71983 2.0 1.0 1.0 3.0 3.0 2.0 2.3 2.0 na na na 3.0 2.11984 1.5 1.3 2.0 4.0 3.0 2.0 2.8 3.0 na na na 4.0 2.41985 2.5 2.0 2.0 5.0 2.8 3.0 3.8 4.0 na na na 5.0 3.01986 3.0 2.3 2.7 6.0 2.4 4.0 3.8 5.0 na na na 3.5 3.11987 3.1 3.3 3.4 7.0 2.6 3.7 4.3 6.0 na 1.0 na 4.5 3.51988 2.8 3.0 4.4 8.0 3.3 3.8 4.0 7.0 na 2.0 na 5.5 3.71989 3.4 3.5 4.9 3.0 3.5 4.0 4.6 4.5 na 2.0 na 2.8 3.81990 3.3 3.2 5.4 2.5 3.5 4.3 5.1 3.3 1.0 1.6 na 3.4 3.71991 3.0 2.8 4.6 2.7 3.7 3.6 4.6 3.6 1.5 2.2 1.0 3.2 3.51992 3.2 2.7 4.6 2.3 3.8 2.7 5.0 4.6 1.6 2.7 1.3 3.3 3.41993 3.4 3.0 4.3 2.6 3.8 2.9 4.4 3.3 1.8 3.5 1.4 3.6 3.41994 3.4 3.3 4.8 2.9 4.1 2.7 4.9 2.8 2.1 3.6 2.1 4.0 3.61995 3.3 3.4 5.5 3.0 4.1 2.6 4.3 2.9 2.3 3.6 2.2 3.2 3.51996 3.4 3.4 5.4 3.2 3.9 3.0 4.6 3.1 2.6 3.1 2.2 3.6 3.51997 3.7 3.4 5.5 3.3 3.6 3.3 4.8 3.2 2.6 3.5 2.6 3.2 3.61998 3.8 3.5 5.3 3.6 3.8 3.1 4.8 3.8 2.7 3.6 2.9 3.5 3.71999 3.9 3.5 5.5 3.6 3.7 3.2 4.5 4.0 3.0 3.7 3.0 3.3 3.72000 4.0 3.5 5.7 3.8 4.1 3.6 4.8 4.2 3.6 3.8 3.1 3.7 3.92001 4.0 3.6 6.2 3.6 4.3 3.6 5.1 4.3 4.4 4.1 3.5 3.8 4.02002 3.9 3.8 5.5 3.5 4.4 3.5 5.2 4.2 4.8 4.0 4.1 3.9 4.02003 4.0 4.0 5.6 3.9 4.7 3.8 5.1 4.2 4.7 3.9 4.2 3.7 4.22004 4.0 4.1 5.5 4.0 4.9 4.1 5.3 4.2 4.7 4.0 4.3 3.8 4.32005 4.4 4.4 5.2 4.5 5.3 4.6 5.7 4.1 4.6 4.7 4.4 4.1 4.6

June 2006 5.3 5.1 5.6 5.2 5.9 5.4 6.5 4.8 4.9 5.4 4.9 4.8 5.3

Strategy

[ 26 ]


D. Management Fees

The management fees of hedge funds attract a great deal of attention, not only from potential investors but also from the financial press. Managers of such funds rely on these fees and performance incentives for their income, above and beyond the returns they receive on their own investments in the funds. Tables 25 and 26 present information on the distributions of the number and assets of all hedge funds grouped by different levels of management fees. Funds with only 5 percent of total assets set such fees at 0.75 percent or less. Funds accounting for 55 percent of total assets, however, set fees at 1.25 percent or higher. Funds with just 2 percent of the assets, which are those at the low and high extremes, set fees at less than 0.25 percent and greater than 2.25 percent, respectively. Over time, the shares of total assets reflecting different management fees have shifted into the higher categories, but with substantial variation across the different ranges of fees.

Table 25: Distribution of the number of hedge funds by management fees(1981–2006)

15

Share of Total Number by Management Fees Total

Number <= 0.25% >0.25%,

<=0.75% >0.75%, <=1.25%

>1.25%, <=1.75%

>1.75%, <=2.25% >2.25% Not

Reported

1981 8 13 0 13 38 25 13 01982 12 8 0 17 42 17 8 8 1983 18 17 6 17 28 22 6 61984 27 11 4 11 33 30 4 7 1985 33 18 3 12 30 27 3 61986 46 17 4 17 24 24 4 9 1987 58 17 3 24 21 22 3 91988 76 16 3 25 22 25 3 7 1989 98 15 2 27 22 24 3 61990 139 16 3 32 19 23 2 4 1991 209 13 3 33 21 22 4 31992 300 12 4 38 19 21 4 2 1993 424 9 4 41 19 21 4 21994 563 8 3 42 20 20 4 2 1995 815 8 3 43 20 20 4 21996 1,117 7 2 44 21 19 4 2 1997 1,522 7 2 44 22 19 3 21998 2,041 7 2 43 22 20 3 1 1999 2,733 7 2 43 22 21 3 22000 3,250 6 2 43 23 20 3 2 2001 3,825 5 2 42 26 20 3 22002 4,596 4 2 40 28 20 3 3 2003 5,333 3 2 38 31 20 3 32004 6,235 3 2 35 33 20 2 4 2005 6,526 2 2 33 35 21 2 4

June 2006 6,445 2 2 32 36 21 2 4

[ 2� ]


Table 26: Distribution of the assets of hedge funds by management fees($ Millions)

16

Share of Total Assets by Management Fees TotalAssets <=

0.25% >0.25%, <=0.75%

>0.75%, <=1.25%

>1.25%, <=1.75%

>1.75%, <=2.25% >2.25% Not

Reported

1981 57 0 0 31 0 69 0 01982 78 0 0 23 10 67 0 0 1983 228 0 68 8 7 17 0 01984 531 2 51 4 35 9 0 0 1985 944 6 55 3 26 10 0 01986 1,177 10 51 5 26 8 0 0 1987 1,486 17 44 8 20 11 0 01988 2,328 20 43 9 9 14 5 0 1989 3,254 18 39 15 10 11 7 01990 5,006 13 28 24 8 16 11 0 1991 7,569 12 26 23 10 22 7 01992 9,553 10 26 23 14 22 5 0 1993 17,182 7 15 23 18 31 5 01994 19,697 7 15 24 19 30 4 0 1995 25,497 9 12 26 19 32 2 01996 35,535 9 8 31 22 29 2 0 1997 58,261 9 5 35 23 26 2 01998 76,906 9 6 39 21 23 2 1 1999 140,265 18 5 34 23 17 2 22000 170,494 14 3 37 23 18 2 3 2001 237,871 11 3 36 26 19 2 32002 281,837 7 3 35 28 21 3 3 2003 508,811 7 3 37 26 19 4 42004 698,593 3 3 34 31 20 3 5 2005 839,069 2 3 34 34 20 2 6

June 2006 968,690 2 3 31 34 21 2 6

[ 2� ]


Tables 27–30 look at the numbers of entering and exiting hedge funds and their asset concentrations, based on strategy distribution and management fees. Funds with 7 percent of total assets of entering hedge funds set management fees at 0.75 percent or less. Funds accounting for 89 percent of total assets of entering funds charge a management fee higher than 0.75 percent, but no greater than 2.25 percent. Funds that account for 91 percent of exiting funds have a management fee between 0.75 percent and 2.25 percent. Only 3 percent exiting funds set the management fee at less than 0.25 percent or higher than 2.25 percent, which are the low and high extremes for management fees, respectively.

Table 27: Distribution of the number of entering hedge funds by management fees

17

Share of Total Number by Management Fees

TotalNumber <= 0.25% >0.25%,

<=0.75% >75%,

<=1.25% >1.25%, <=1.75%

>1.75%, <=2.25% >2.25% Not

Reported

1981 8 13 0 13 38 25 13 01982 4 0 0 25 50 0 0 25 1983 6 33 17 17 0 33 0 01984 9 0 0 0 44 44 0 11 1985 6 50 0 17 17 17 0 01986 13 15 8 31 8 15 8 15 1987 12 17 0 50 8 17 0 81988 18 11 0 28 28 33 0 0 1989 22 14 0 32 23 23 5 51990 41 17 5 46 12 20 0 0 1991 70 7 4 34 24 21 9 01992 91 9 7 49 14 19 2 0 1993 124 4 2 49 19 19 6 11994 139 4 3 46 24 18 4 1 1995 252 7 2 44 21 21 4 21996 302 6 1 48 24 16 4 2 1997 405 7 2 44 25 19 1 21998 525 7 3 41 21 24 3 1 1999 740 6 2 41 21 24 4 32000 740 9 1 45 25 16 2 3 2001 915 5 2 38 31 20 1 32002 1,117 4 3 34 32 20 2 5 2003 1,176 5 2 32 36 19 2 52004 1,372 4 2 26 39 22 2 4 2005 1,057 3 2 22 42 27 1 3

June 2006 381 4 1 20 44 29 3 1

[ 2� ]


Table 28: Distribution of the number of exiting hedge funds by management fees

Share of Total Number by Management Fees

TotalNumber <= 0.25% >0.25%,

<=0.75% >75%,

<=1.25% >1.25%, <=1.75%

>1.75%, <=2.25% >2.25% Not

Reported

1981 na na na na na na na na1982 na na na na na na na na 1983 na na na na na na na na1984 na na na na na na na na 1985 na na na na na na na na1986 na na na na na na na na 1987 na na na na na na na na1988 na na na na na na na na 1989 na na na na na na na na1990 na na na na na na na na 1991 na na na na na na na na1992 na na na na na na na na 1993 na na na na na na na na1994 na na na na na na na na 1995 na na na na na na na na1996 na na na na na na na na 1997 na na na na na na na na1998 6 83 0 17 0 0 0 0 1999 48 21 0 48 4 23 4 02000 223 18 2 47 13 19 1 0 2001 340 16 3 40 16 20 0 42002 346 17 3 44 16 14 2 3 2003 439 12 2 43 18 21 2 22004 470 8 1 42 24 20 4 1 2005 766 11 1 35 27 23 2 1

June 2006 462 4 3 37 28 23 2 2 Note: Data on exiting funds have been available since 1998.

[ �0 ]


Table 29: Distribution of the assets of entering hedge funds by management fees($ Millions)

Share of Total Assets by Management Fees

TotalAssets <= 0.25%

>0.25% and

<=0.75%

>75% and

<=1.25%

>1.25% and

<=1.75%

>1.75% and

<=2.25% >2.25% Not

Reported

1981 57 0 0 31 0 69 0 01982 8 0 0 0 100 0 0 0 1983 157 0 99 1 0 0 0 01984 8 0 0 0 0 100 0 0 1985 37 100 0 0 0 0 0 01986 35 0 0 80 0 20 0 0 1987 68 75 0 10 0 15 0 01988 104 7 0 63 11 18 0 0 1989 259 2 0 70 26 2 0 01990 726 14 1 60 1 24 0 0 1991 976 0 32 25 24 17 2 01992 1,248 6 33 15 32 14 0 0 1993 1,596 1 0 16 69 13 1 01994 894 2 2 52 28 11 1 4 1995 2,008 9 7 33 23 22 2 31996 2,952 4 0 39 33 21 4 0 1997 4,793 4 6 44 22 23 0 11998 5,565 5 4 43 23 23 0 2 1999 15,506 6 0 28 47 13 1 32000 21,406 55 1 18 17 6 0 4 2001 18,601 2 1 36 31 22 0 82002 25,849 10 3 32 30 18 2 6 2003 59,503 2 1 64 18 10 1 32004 50,824 2 2 25 44 16 1 10 2005 45,262 2 0 29 33 30 0 5

June 2006 16,467 8 0 41 25 24 2 0

[ �� ]


Table 30: Distribution of the assets of exiting hedge funds by management fees($ Millions)

Share of Total Assets by Management Fees

TotalAssets <= 0.25%

>0.25% and

<=0.75%

>75% and

<=1.25%

>1.25% and

<=1.75%

>1.75% and

<=2.25% >2.25% Not

Reported

1981 na na na na na na na na1982 na na na na na na na na 1983 na na na na na na na na1984 na na na na na na na na 1985 na na na na na na na na1986 na na na na na na na na 1987 na na na na na na na na1988 na na na na na na na na 1989 na na na na na na na na1990 na na na na na na na na 1991 na na na na na na na na1992 na na na na na na na na 1993 na na na na na na na na1994 na na na na na na na na 1995 na na na na na na na na1996 na na na na na na na na 1997 na na na na na na na na1998 125 99 0 1 0 0 0 0 1999 2,022 18 0 64 0 16 2 02000 12,436 46 0 34 15 5 0 0 2001 10,115 15 12 29 21 14 0 92002 25,490 54 1 28 10 6 0 1 2003 15,552 8 1 31 21 34 3 22004 74,791 27 0 54 7 9 0 2 2005 67,725 14 3 32 27 23 0 0

June 2006 48,582 2 1 42 19 30 1 4 Note: Data on exiting funds have been available since 1998.

[ �2 ]


The performance incentives of hedge funds clearly attract the most attention. The reason is seen in tables 31 and 32. As of June 2006, 60 percent of all hedge funds charged incentives of 15 percent or higher. The hedge funds charging these fees, moreover, accounted for 56 percent of total assets.

We detect a binomial distribution of incentive fees in the following sense: Most funds with the most assets either charge less than 10 percent or between 15 percent and 20 percent. There is roughly a 30 percent to 50 percent split, in terms of both number and assets, for funds charging 10 percent or less and those charging between 15 percent and 20 percent, respectively. The performance incentives, moreover, have tended to drift upward since the early 1980s, despite the tremendous increase in the number and assets of hedge funds.

Table 31: Distribution of the number of hedge funds by incentive fees

Share of Total Number by Incentive Fees

TotalNumber <= 5% >5%,

<=10% >10%, <=15%

>15%, <=20%

>20%, <=25% >25% Not

Reported

1981 8 38 13 0 25 13 13 01982 12 42 8 0 25 8 8 8 1983 18 44 6 0 33 6 6 61984 27 30 11 11 33 7 4 4 1985 33 33 9 9 36 6 3 31986 46 30 7 9 41 4 4 4 1987 58 29 7 7 43 3 3 71988 76 26 9 7 45 4 3 7 1989 98 30 7 5 47 3 2 61990 139 28 6 5 50 4 1 6 1991 209 25 6 6 54 4 1 41992 300 24 6 7 53 4 2 4 1993 424 23 7 7 56 4 1 31994 563 22 8 6 55 5 1 3 1995 815 21 9 6 55 5 1 31996 1,117 20 9 6 57 4 1 3 1997 1,522 19 9 6 58 4 1 31998 2,041 19 9 5 59 5 1 3 1999 2,733 17 9 5 60 5 1 32000 3,250 16 10 4 61 4 1 4 2001 3,825 15 12 4 60 4 1 42002 4,596 14 15 4 58 3 1 5 2003 5,333 14 16 4 57 3 1 62004 6,235 13 17 4 56 3 1 6 2005 6,526 12 18 4 56 3 1 7

June 2006 6,445 11 18 5 56 3 1 7

[ �� ]


Table 32: Distribution of the assets of hedge funds by incentive fees ($ Millions)

Share of Total Assets by Incentive Fees

TotalAssets <= 5% >5% and

<=10%

>10% and

<=15%

>15% and

<=20%

>20% and

<=25% >25% Not

Reported

1981 57 31 0 0 69 0 0 01982 78 33 0 0 67 0 0 0 1983 228 82 0 0 18 0 0 01984 531 90 0 1 8 0 0 0 1985 944 89 0 4 6 0 0 01986 1,177 89 0 3 8 0 0 0 1987 1,486 83 1 1 16 0 0 01988 2,328 73 1 1 21 0 5 0 1989 3,254 65 1 1 26 0 7 01990 5,006 48 1 8 29 3 11 0 1991 7,569 43 3 6 35 3 11 01992 9,553 38 2 6 40 2 12 0 1993 17,182 41 2 5 40 3 9 11994 19,697 38 2 4 43 4 8 1 1995 25,497 32 2 5 47 6 6 21996 35,535 25 3 5 53 6 6 2 1997 58,261 21 4 4 58 7 5 21998 76,906 22 6 4 55 6 5 2 1999 140,265 29 6 3 52 4 4 32000 170,494 23 8 2 56 4 3 4 2001 237,871 21 9 3 58 3 2 42002 281,837 18 11 3 58 4 2 5 2003 508,811 24 11 3 52 4 1 62004 698,593 15 14 3 56 3 1 7 2005 839,069 15 17 4 53 3 1 9

June 2006 968,690 15 15 4 52 3 1 9

[ �� ]


Tables 33–36 look at the numbers of entering and exiting hedge funds and their asset allocations, based on strategy distribution and management incentives. Fifty-eight percent of all entering funds, which represent 59 percent of total assets, set the incentive fee at 15 percent to 20 percent in 2006. That fee range also corresponds to 64 percent of all exiting funds, which represent 48 percent in assets. Funds that account for 30 percent of total assets of exiting funds have an incentive fee of less than or equal to 5 percent.

Table 33: Distribution of the number of entering hedge funds by incentive fees

21


TotalNumber <= 5% >5% and

<=10% >10% and

<=15% >15% and

<=20% >20% and

<=25% >25% NotReported

1981 8 38 13 0 25 13 13 01982 4 50 0 0 25 0 0 25 1983 6 50 0 0 50 0 0 01984 9 0 22 33 33 11 0 0 1985 6 50 0 0 50 0 0 01986 13 23 0 8 54 0 8 8 1987 12 25 8 0 50 0 0 171988 18 17 17 6 50 6 0 6 1989 22 41 0 0 55 0 0 51990 41 24 5 5 56 5 0 5 1991 70 19 6 7 61 4 1 11992 91 23 7 9 53 4 2 2 1993 124 19 9 6 62 2 0 21994 139 21 10 5 53 8 0 4 1995 252 18 11 6 55 6 2 31996 302 17 10 6 61 3 0 3 1997 405 18 9 5 60 4 0 21998 525 18 8 2 63 5 1 2 1999 740 14 9 4 63 5 1 42000 740 14 13 4 61 3 1 4 2001 915 12 16 3 59 3 1 62002 1,117 12 19 3 55 2 1 7 2003 1,176 13 17 3 56 3 1 72004 1,372 12 20 5 53 2 0 8 2005 1,057 5 20 4 63 2 1 6

June 2006 381 7 18 7 58 3 2 5

[ �� ]


Table 34: Distribution of the number of exiting hedge funds by incentive fees


TotalNumber <= 5% >5% and

<=10% >10% and

<=15% >15% and

<=20% >20% and


1981 na na na na na na na na1982 na na na na na na na na 1983 na na na na na na na na1984 na na na na na na na na 1985 na na na na na na na na1986 na na na na na na na na 1987 na na na na na na na na1988 na na na na na na na na 1989 na na na na na na na na1990 na na na na na na na na 1991 na na na na na na na na1992 na na na na na na na na 1993 na na na na na na na na1994 na na na na na na na na 1995 na na na na na na na na1996 na na na na na na na na 1997 na na na na na na na na1998 6 83 0 0 17 0 0 0 1999 48 23 4 4 65 4 0 02000 223 28 2 7 57 4 1 0 2001 340 19 4 4 62 6 1 42002 346 17 3 3 67 5 1 4 2003 439 13 12 4 64 3 1 32004 470 14 10 3 67 2 2 3 2005 766 18 10 2 65 3 0 1

June 2006 462 18 13 3 59 2 1 4 Note: Data on exiting funds have been available since 1998.

[ �6 ]


Table 35: Distribution of the assets of entering hedge funds by incentive fees($ Millions)

23


TotalAssets <= 5% >5% and

<=10% >10% and

<=15% >15% and

<=20% >20% and


1981 57 31 0 0 69 0 0 01982 8 100 0 0 0 0 0 0 1983 157 99 0 0 1 0 0 01984 8 0 0 98 2 0 0 0 1985 37 100 0 0 0 0 0 01986 35 0 0 0 100 0 0 0 1987 68 75 15 0 10 0 0 01988 104 7 4 0 88 1 0 0 1989 259 6 0 0 94 0 0 01990 726 15 0 53 15 17 0 0 1991 976 5 11 1 43 8 32 11992 1,248 13 3 2 45 2 32 2 1993 1,596 68 5 0 19 7 0 01994 894 18 5 3 57 12 0 5 1995 2,008 12 5 6 54 2 8 131996 2,952 17 10 3 61 6 0 2 1997 4,793 18 11 2 59 9 1 11998 5,565 28 9 0 56 3 1 3 1999 15,506 16 7 6 62 5 0 42000 21,406 58 6 1 28 1 1 6 2001 18,601 13 18 2 55 1 1 102002 25,849 17 20 3 47 4 1 9 2003 59,503 57 9 1 27 0 0 62004 50,824 8 22 4 53 1 1 12 2005 45,262 6 22 1 61 0 0 9

June 2006 16,467 10 13 8 64 1 1 3

[ �� ]


Table 36: Distribution of the assets of exiting hedge funds by incentive fees($ Millions)


Total Assets <= 5% >5% and <=10%

>10% and <=15%

>15% and <=20%

>20% and <=25% >25% Not Reported

1981 na na na na na na na na1982 na na na na na na na na 1983 na na na na na na na na1984 na na na na na na na na 1985 na na na na na na na na1986 na na na na na na na na 1987 na na na na na na na na1988 na na na na na na na na 1989 na na na na na na na na1990 na na na na na na na na 1991 na na na na na na na na1992 na na na na na na na na 1993 na na na na na na na na1994 na na na na na na na na 1995 na na na na na na na na1996 na na na na na na na na 1997 na na na na na na na na1998 125 99 0 0 1 0 0 0 1999 2,022 9 0 4 85 2 0 02000 12,436 61 0 6 32 0 0 0 2001 10,115 11 2 1 56 10 12 92002 25,490 54 3 1 40 1 0 1 2003 15,552 11 5 1 79 1 0 22004 74,791 67 6 0 23 0 0 3 2005 67,725 23 5 2 65 5 0 0

June 2006 48,582 30 13 1 48 2 0 5 Note: Data on exiting funds have been available since 1998.

[ �� ]


E. Lockup Periods

When investors initially put their money into hedge funds, they cannot freely cash out at any time thereafter. Instead, they are required to remain in the fund over a specified period of time before any withdrawals may take place. The required minimum time period is the initial lockup period. Table 37 shows the distribution of the number of hedge funds by the initial lockup period. Nearly 50 percent of funds have a lockup period of up to 30 days, with the vast majority of the remaining funds having a lockup period of up to a year.

Table 37: Distribution of number of hedge funds by initial lockup period, all funds

Number of Funds by Initial Lockup Period (%)

Assets of all funds

Less than a month

More than a month, less

than a quarter

More than a quarter, less than a year

More than a year Not reported

1981 8 63 0 38 0 01982 12 67 0 33 0 0 1983 18 72 6 22 0 01984 27 63 11 15 0 11 1985 33 61 9 21 0 91986 46 61 11 22 0 7 1987 58 60 10 22 0 71988 76 57 11 26 1 5 1989 98 59 9 27 1 41990 139 53 14 29 1 3 1991 209 47 16 33 1 21992 300 45 17 34 2 3 1993 424 44 19 32 2 21994 563 45 18 32 2 2 1995 815 45 20 30 2 21996 1,117 44 21 31 2 2 1997 1,522 46 20 30 2 21998 2,041 46 19 31 2 2 1999 2,733 46 20 30 2 22000 3,250 46 20 31 2 2 2001 3,825 47 19 30 2 22002 4,596 46 19 30 2 2 2003 5,333 47 19 30 3 22004 6,235 47 19 30 3 2 2005 6,526 47 19 30 3 2

June 2006 6,445 47 18 30 3 2

[ �� ]


Table 38: Distribution of the assets of entering hedge funds by initial lockup period ($ Millions)

Share of Total Assets by Initial Lockup Period

Total Assets Less than a month


than a quarter



1981 57 69 0 31 0 01982 8 0 0 69 0 31 1983 157 99 0 0 0 11984 8 98 0 0 0 2 1985 37 0 0 61 0 391986 35 0 0 80 0 20 1987 68 1 17 75 0 71988 104 68 9 6 7 9 1989 259 9 52 17 22 01990 726 10 56 12 5 17 1991 976 25 2 36 0 371992 1,248 20 4 8 0 68 1993 1,596 57 12 10 1 201994 894 34 8 31 1 25 1995 2,008 28 13 37 1 211996 2,952 34 15 26 8 16 1997 4,793 26 17 32 1 251998 5,565 41 18 27 3 10 1999 15,506 44 4 26 2 232000 21,406 69 6 17 0 8 2001 18,601 34 16 25 1 232002 25,849 38 15 25 1 21 2003 59,503 16 57 12 1 142004 50,824 25 9 25 3 37 2005 45,262 28 6 26 3 36

June 2006 16,467 11 2 49 2 36

Tables 38 and 39 illustrate the distribution of assets by entering and exiting hedge funds, based on lockup periods. Funds representing half the assets of all entering funds have a lockup period longer than one quarter, but no longer than one year. However, this group of funds only represents 30 percent of the assets of exiting funds. Funds with a lockup period up to 30 days account for 22 percent of the exiting funds in terms of assets.

[ �0 ]


Table 39: Distribution of the assets of exiting hedge funds by initial lockup period($ Millions)

Table 43: Distribution of the assets of exiting hedge funds by initial lockup period ($ Millions)

Share of Total Assets by Initial Lockup Period

Total Assets Less than a month


than a quarter



1981 na na na na na na1982 na na na na na na 1983 na na na na na na1984 na na na na na na 1985 na na na na na na1986 na na na na na na 1987 na na na na na na1988 na na na na na na 1989 na na na na na na1990 na na na na na na 1991 na na na na na na1992 na na na na na na 1993 na na na na na na1994 na na na na na na 1995 na na na na na na1996 na na na na na na 1997 na na na na na na1998 125 3 96 0 0 1 1999 2,022 28 29 10 32 02000 12,436 51 17 15 0 17 2001 10,115 39 13 23 1 252002 25,490 61 4 26 0 9 2003 15,552 28 10 31 2 292004 74,791 29 53 11 0 6 2005 67,725 34 20 22 0 24

June 2006 48,582 22 15 30 4 28 Note: Data on exiting funds has been available since 1997.

[ �� ]


The distribution of the assets of funds by lockup period closely parallels that for the number of funds. As table 40 shows, 49 percent of the assets of all funds are linked to lockup periods of up to 30 days. Only 2 percent are linked to lockup periods exceeding a year. Over time, there has been a shift toward longer lockup periods employed by more funds with more assets.

Table 40: Distribution of hedge funds assets by initial lockup period, all funds($ Millions)

Share of Assets by Initial Lockup Period (%)

Assets of all funds

Less than a month


than a quarter


More than a year

Not reported

1981 57 69 0 31 0 0

1982 78 70 0 30 0 0

1983 228 87 0 13 0 0

1984 531 92 0 6 0 1

1985 944 90 0 6 0 4

1986 1,177 87 0 9 0 3

1987 1,486 88 1 11 0 1

1988 2,328 84 1 8 3 5

1989 3,254 84 1 9 2 3

1990 5,006 77 2 18 2 1

1991 7,569 75 5 17 2 1

1992 9,553 69 6 21 2 2

1993 17,182 62 7 21 2 9

1994 19,697 60 8 20 3 8

1995 25,497 56 11 23 3 6

1996 35,535 50 14 27 4 5

1997 58,261 45 20 27 4 4

1998 76,906 48 17 27 4 4

1999 140,265 49 17 30 2 2

2000 170,494 47 19 29 3 2

2001 237,871 48 20 28 3 2

2002 281,837 47 22 28 1 2

2003 508,811 47 20 30 2 2

2004 698,593 50 22 25 2 1

2005 839,069 49 21 26 2 1

June 2006 968,690 49 20 27 2 2

[ �2 ]


Table 41: Initial lockup period and hedge funds assets by fund size, all funds($ Millions, June 2006)

Lockup Period

Less than a month


than a quarter


More than a year

Not reported All lockup

periods

<=$10 million 2,291 944 1,701 186 100 5,222


23,352 8,970 15,344 1,389 873 49,928


27,606 11,639 18,807 2,218 595 60,865

>$100 million, <= $500 million

177,595 61,375 100,642 9,239 6,036 354,886

>$500 million, <= 1 billion

82,463 28,974 41,810 5,895 1,492 160,634

Ass

et S

ize

> $1 billion 162,455 85,633 78,996 4,111 5,960 337,155

All asset sizes 475,762 197,535 257,300 23,038 15,055 968,690

We also examine the lockup periods employed by funds of different sizes and strategies. Table 41 shows that there is not much of a difference in lockup periods employed by funds of varying sizes. Table 42 provides similar information for funds according to strategies. The lockup period is shortest for the commodity trading adviser funds and longest for the sector funds, with event-driven funds closely behind. In the case of commodity trading adviser funds, 91 percent of the assets are in the funds with a lockup period of 30 days or less; in the case of sector funds, 61 percent of the assets are in the funds with a lockup period of more than 90 days, but less than a year.

[ �� ]


Table 42: Initial lockup period and hedge funds assets by strategy, all funds ($ Millions, June 2006)

Lockup Period

Less than a month


than a quarter


More than a year Not reported All lockup

periods

Fund of funds - multistrategies 138,164 90,277 56,716 1,009 6,501 292,666

Directional 5,067 382 2,290 564 861 9,165

Fund of funds 39,038 23,924 21,634 550 87 85,233

Event-driven 27,939 14,686 41,569 8,990 160 93,343

Market-neutral 45,706 11,854 19,084 1,855 1,358 79,857

Commodity trading advisor 42,527 2,105 952 16 1,108 46,709

Multistrategy 17,130 18,413 28,736 1,141 38 65,457

Global 25,880 7,485 7,186 1,432 1,632 43,615

Macro 17,348 3,281 5,985 12 478 27,104

Sector 4,628 1,590 10,082 305 10 16,615

Long/shortequity 86,704 20,492 45,141 6,105 1,804 160,245

Stra

tegy

Other 25,631 3,046 17,926 1,060 1,019 48,682

All strategies 475,762 197,535 257,300 23,038 15,055 968,690

[ �� ]


Table 43: Top 15 accounting firms servicing hedge fundsranked by assets of funds serviced (June 2006)

Share of Total (%)

Number Assets

1 PricewaterhouseCoopers 21.3 26.9 2 Ernst & Young 17.7 21.8 3 KPMG 14.7 16.2 4 Deloitte & Touche 9.2 9.9 5 Rothstein Kass & Company 6.0 3.4 6 Goldstein Golub Kessler LLP 2.6 2.2 7 RSM (Cayman) 1.1 1.3 8 BDO Seidman LLP 1.4 1.0 9 Grant Thornton 1.2 0.8

10 Arthur F. Bell & Associates LLC 0.9 0.8 11 Anchin, Block & Anchin LLP 0.6 0.7 12 Eisner LLP 1.3 0.6 13 RSM Robson Rhodes LLP 0.4 0.5 14 Altschuler, Melvoin & Glasser LLP 0.7 0.2 15 Kaufman Rossin & Co. 0.4 0.1

Other 9.3 2.6 None listed 11.2 11.0

Total number and assets 6,445 $968,690 Million

Since hedge funds require the services of both accounting and brokerage firms, it is informative to examine which firms are most frequently used. Table 43 shows that three accounting firms, PriceWaterhouse Coopers, Ernst & Young, and KPMG, are the firms of choice for 54 percent of all hedge funds reporting such information, and that these funds account for 65 percent of total assets.

[ �� ]


Table 44: Top 15 brokerage firms servicing hedge funds

Prime Broker Share of Total (%)

Number Assets

1 Morgan Stanley 8.8 9.9 2 Goldman Sachs Group Inc. 9.5 7.5 3 Bear Stearns & Co. 7.0 7.3 4 Citigroup Global Prime Brokerage 1.9 3.4 5 UBS 4.7 3.3 6 Merrill Lynch & Co. Inc. 1.7 2.1 7 Deutsche Bank AG 2.0 1.9 8 Banc of America Securities LLC 3.4 1.9 9 HSBC 0.7 1.9

10 Lehman Brothers 1.6 1.2 11 Credit Suisse 1.5 1.0 12 Fimat Alternative Investor Solutions 0.9 0.9 13 Citco 0.4 0.8 14 Calyon Financial 0.6 0.5 15 Smith Barney 0.4 0.5 Other 17.5 14.9 None listed 37.3 41.0

Total number and assets 6,445 $968,690 Million

As table 44 shows, nearly 40 percent of the funds with 41 percent of total assets do not report information about which brokerage firms are used. Of those that do report this information, Morgan Stanley, Goldman Sachs, and Bear Stearns are the top three firms, jointly servicing about 25 percent of all funds with about 25 percent of total assets.

[ �6 ]


Table 45: Average monthly returns of hedge funds (percent)Table 45. Average monthly returns of hedge funds (percent)


Long/ShortEquity Directional

Fund of funds

Event-driven

Market-neutral


Multi-strategy Global Macro Sector Other

AllStrategies

1981 na na na 1.6 1.6 na 2.4 na na na na 0.2 2.21982 1.5 na na 2.6 2.5 1.9 2.1 4.2 na na na 3.0 2.41983 1.2 1.0 1.3 1.8 1.7 0.5 2.0 1.7 na na na 0.2 1.51984 0.7 1.0 1.0 -0.2 0.7 1.9 2.8 0.0 na na na 1.2 1.51985 2.8 2.6 3.0 2.4 2.5 1.9 3.1 1.5 na na na 2.4 2.71986 1.7 0.6 3.0 1.2 1.1 0.7 1.8 1.4 na na na 1.4 1.61987 2.5 0.5 1.1 0.7 1.0 1.7 3.6 1.1 na 1.9 na -0.2 1.81988 1.4 1.4 1.5 1.0 2.2 1.6 1.9 0.0 na 0.9 na 1.0 1.61989 1.4 2.1 2.3 0.4 1.9 1.1 1.6 1.8 na 2.5 na 0.4 1.61990 1.7 0.4 -0.4 1.0 0.5 0.6 2.6 -0.2 2.2 5.2 na -0.2 1.21991 1.0 3.1 2.0 1.3 2.1 2.1 2.4 1.6 1.5 3.0 1.9 2.7 2.11992 1.1 1.8 1.2 1.1 1.5 1.0 1.3 1.2 0.3 1.9 1.8 1.8 1.41993 2.0 2.1 1.5 2.1 1.9 1.4 2.4 1.7 11.0 4.0 3.1 2.1 2.31994 0.0 0.5 1.6 -0.1 0.2 0.9 0.6 0.3 2.8 -0.7 0.4 -0.1 0.41995 1.1 2.4 1.3 1.2 2.0 1.6 2.4 1.5 0.7 2.1 3.1 1.4 1.81996 1.4 2.2 1.4 1.5 1.9 1.4 2.2 1.7 2.9 2.0 3.3 1.3 1.81997 1.3 1.8 1.2 1.2 2.0 1.3 1.8 1.7 1.7 1.6 2.0 1.0 1.61998 0.3 1.6 0.9 0.4 1.1 0.9 1.6 0.7 -2.2 1.3 1.5 0.7 0.91999 2.0 4.1 1.7 2.2 3.1 1.4 0.9 2.6 4.5 2.1 5.4 1.4 2.62000 0.9 1.5 0.9 0.7 1.1 0.9 1.3 1.1 0.1 0.7 1.6 1.1 1.12001 0.5 0.6 0.5 0.3 0.8 0.6 0.8 0.7 2.2 0.9 0.0 1.0 0.72002 0.2 0.0 0.3 0.1 0.2 0.6 1.5 0.6 0.9 0.8 -0.6 0.6 0.32003 0.9 1.7 1.1 0.8 1.9 0.7 1.2 1.3 2.9 1.7 2.0 1.2 1.32004 0.6 0.8 0.6 0.6 1.2 0.4 0.5 0.9 1.5 0.4 1.1 0.7 0.72005 0.6 1.0 1.2 0.6 0.7 0.4 0.5 0.8 2.2 0.6 0.7 0.6 0.7

June 2006 0.6 0.7 0.7 0.5 1.1 0.7 0.6 1.0 1.1 0.7 0.9 0.6 0.7

Strategy

F. Performance and Risk of Hedge Funds

Hedge fund performance and risk understandably attract the most investor attention. Table 45 shows the average monthly return of hedge funds from 1981 to June 2006. The returns range from a low of 0.4 percent in 1994 to a high of 2.7 percent in 1985. There is substantial variation, depending on the strategy the fund employs. As the table shows, the highest average monthly return (11 percent) was reported by those funds employing a global strategy, while the lowest return (-2.2 percent) was reported by those also employing a global strategy.

[ �� ]


Table 46. Standard deviation of monthly returns of hedge funds (percent)


Long/ShortEquity Directional

Fund of funds

Event-driven

Market-neutral


Multi-strategy Global Macro Sector Other

AllStrategies

1981 na na na 2.2 6.2 na 5.2 na na na na 5.4 5.81982 0.8 na na 2.9 5.9 0.9 5.0 2.9 na na na 3.3 3.91983 1.0 4.5 2.6 3.0 4.0 2.0 10.3 3.2 na na na 3.2 5.41984 2.6 2.9 3.9 na 3.3 2.9 11.6 4.2 na na na 3.5 6.31985 2.4 3.9 3.1 4.0 4.4 2.4 8.6 1.8 na na na 3.4 4.71986 3.2 5.0 5.4 4.4 5.0 3.8 7.4 3.4 na na na 3.2 5.31987 4.4 10.0 6.4 8.6 8.6 5.8 8.6 5.7 na 12.4 na na 7.61988 2.7 3.2 2.9 2.7 3.5 2.0 9.7 2.8 na 3.2 na 2.2 4.61989 2.3 3.5 2.8 6.1 3.4 2.4 9.3 1.5 na 6.7 na 1.6 4.41990 2.8 4.6 5.0 1.8 3.8 2.5 6.0 1.1 na 9.8 na 3.5 4.31991 2.2 4.9 4.4 2.0 3.6 2.8 8.3 1.2 4.8 5.8 1.3 3.3 4.21992 2.2 3.5 4.2 2.1 2.9 2.3 6.6 1.6 1.9 4.4 2.8 2.4 3.31993 2.0 3.5 3.4 2.4 3.0 1.5 5.3 1.9 8.5 6.6 5.2 2.8 3.31994 2.0 3.4 4.2 1.7 2.6 1.6 6.0 2.8 12.1 3.2 5.4 1.7 3.31995 1.6 3.8 3.1 1.7 2.8 1.7 6.3 2.2 5.6 7.4 4.4 2.0 3.21996 1.8 4.5 4.2 2.0 2.9 1.5 6.8 2.3 5.6 4.2 5.1 2.7 3.41997 2.0 5.1 4.9 2.4 3.5 1.5 5.7 2.6 8.1 4.6 6.3 2.8 3.71998 2.5 6.2 6.9 3.0 4.6 2.5 6.4 3.6 5.6 5.0 7.9 3.6 4.61999 2.4 6.7 6.5 2.7 5.3 2.3 5.2 4.3 8.5 5.2 9.2 3.7 4.72000 2.1 6.4 8.4 2.4 4.7 2.4 5.1 3.3 7.7 4.8 9.7 4.5 4.52001 1.2 4.0 6.6 1.4 4.0 1.9 5.4 2.0 6.4 3.7 4.5 3.3 3.12002 1.1 3.4 4.9 1.3 2.9 1.6 5.7 2.2 4.3 3.4 2.9 2.6 2.62003 1.0 3.1 4.1 1.1 2.5 1.6 5.1 2.1 3.6 3.5 3.4 1.8 2.32004 1.2 2.8 3.5 1.3 2.5 1.2 4.7 1.9 3.5 2.8 2.8 1.4 2.12005 1.4 2.9 3.6 1.5 2.3 1.3 3.8 2.0 3.8 3.0 3.0 1.3 2.2

June 2006 1.8 3.3 4.4 1.8 2.4 1.3 4.2 2.0 4.5 3.3 2.9 1.2 2.4

Strategy

Table 46 illustrates the volatility of average monthly returns, as measured by the standard deviation of returns. The table shows that volatility for all funds has decreased over time, and that it differs widely among funds, depending upon the strategy employed. The most volatile return was reported by those funds employing a macro strategy in 1987, while the lowest volatility was reported by the fund of funds employing multiple strategies in 1982.

Table 46: Standard deviation of monthly returns of hedge funds (percent)

[ �� ]


Table 47: Number of hedge funds with persistent positive returns

Number of Funds with Consecutive Positive Returns

1st year last 2 years last 3 years last 4 years last 5 years

1981 91982 14 9 1983 19 13 91984 23 14 10 7 1985 33 22 14 10 71986 42 30 20 13 9 1987 43 28 21 14 111988 72 39 24 20 13 1989 89 68 37 23 201990 108 67 50 29 17 1991 192 96 57 43 251992 270 174 85 50 37 1993 407 262 168 84 501994 347 244 157 94 45 1995 748 322 230 151 931996 1,061 729 315 226 147 1997 1,390 999 689 301 2151998 1,480 993 709 491 237 1999 2,459 1,325 868 618 4262000 2,698 1,863 1,004 659 471 2001 3,137 2,040 1,398 751 5052002 3,218 2,072 1,386 952 496 2003 5,161 2,746 1,766 1,174 8402004 5,728 4,316 2,293 1,494 992 2005 6,177 4,743 3,549 1,867 1,222

June 2006 5,573 4,862 3,814 2,861 1,559

It is also informative to examine the persistence of both positive and negative returns reported by funds. Tables 47 and 48 show the number and assets of funds with persistent positive returns over selected time periods. They indicate that 1,559 funds with $442 billion in assets as of June 2006 reported positive returns over the previous consecutive five-year period.

[ �� ]


Table 48: Assets of hedge funds with persistent positive returns ($ Millions)

Assets of Funds with Consecutive Positive Returns


1981 181982 78 18 1983 190 33 181984 362 315 34 18 1985 922 694 599 57 271986 1,101 1,063 787 750 83 1987 1,425 1,210 1,112 845 8291988 2,319 2,070 1,639 1,379 1,200 1989 2,933 2,667 2,335 2,097 1,783 1990 2,693 1,939 1,513 1,223 961 1991 7,391 3,668 2,609 2,138 1,496 1992 8,296 7,045 3,302 2,174 1,466 1993 16,763 13,344 9,707 5,275 3,817 1994 8,178 7,459 5,781 4,017 2,994 1995 24,354 11,742 10,227 8,103 5,275 1996 34,944 30,999 15,364 12,674 9,367 1997 56,458 51,317 42,752 21,300 16,771 1998 59,586 53,728 45,983 39,481 20,294 1999 130,467 83,767 71,135 54,725 46,580 2000 136,988 121,890 84,063 68,306 56,781 2001 204,820 166,155 137,658 88,413 71,677 2002 219,303 186,291 151,760 125,441 74,378 2003 490,756 356,276 276,249 223,287 184,287 2004 635,840 580,046 432,469 337,864 269,086 2005 788,039 713,267 610,264 424,411 333,090

June 2006 864,344 819,711 741,505 623,579 442,443

[ �0 ]


Table 49: Number of hedge funds with persistent negative returns

Number of Funds with Consecutive Negative Returns


1981 11982 0 0 1983 1 0 01984 5 0 0 0 1985 2 0 0 0 01986 5 0 0 0 0 1987 16 1 0 0 01988 3 0 0 0 0 1989 6 0 0 0 01990 29 1 0 0 0 1991 16 2 0 0 01992 29 7 1 0 0 1993 17 7 4 1 01994 214 6 1 0 0 1995 63 17 0 0 01996 55 12 0 0 0 1997 124 9 5 0 01998 550 53 2 2 0 1999 289 60 6 2 22000 675 41 8 1 0 2001 817 221 7 0 02002 1,511 405 131 2 0 2003 395 67 11 1 02004 767 127 13 5 0 2005 736 149 35 0 0

June 2006 1,128 175 53 15 0

In contrast, tables 49 and 50 show similar information for funds reporting negative returns. Only two funds reported consecutive negative returns for any year from 1981 to June 2006. This occurred in 1999, and the two funds had only $16 million in assets. However, as of June 2006, there were 1,128 funds with $104 billion in assets that reported negative returns in the previous year.

[ �� ]


[ �2 ]


Chart 7: Five-year risk vs. return of hedge funds, all funds(January 2001 – December 2005)

Fund of Funds

Other

Market-Neutral

Fund of Funds -Multistrategies

All Funds CTA

DirectionalLong/Short Equity

Macro

Sector

Multistategy

Event-Driven

Globaly = 0.1307x + 0.4373

R2 = 0.129

0.0

0.5

1.0

1.5

2.0

2.5

0 1 2 3 4 5 6

Standard Deviation of Monthly Return (%)

Ave

rage

Mon

thly

Ret

urn

(%)

Chart 8: Risk vs. return of hedge funds, all funds (2005)

GlobalEvent-Driven

MultistategySector

Macro

Long/Short EquityDirectional

CTAAll Funds

Fund of Funds-Multistrategies

Market-Neutral

Other

Fund of Funds

y = 0.0511x + 0.6344

R2 = 0.0871

0.0

0.3

0.6

0.9

1.2

1.5

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Standard Deviation of Monthly Return (%)

Ave

rage

Mon

thly

Ret

urn

(%)

Charts 7 and 8 show the risk-return tradeoffs for hedge funds grouped on the basis of strategy. The charts indicate a significantly positive relationship on average between return and risk. Still, some of the strategies employed by funds have underperformed, in terms of generating a return that compensates for the associated risk. This is the case for several strategies when examining the tradeoffs both for the most recent five-year period and the past year, but especially so in the latter case.

[ �� ]


Chart 9: Five-year risk vs. return of hedge funds (January 2001 – December 2005)

y = 0.08x + 0.52R2 = 0.03

-10

-8

-6

-4

-2

0

2

4

6

8

10

0 5 10 15 20 25 30

Standard deviation of monthly return (%)

Ave

rage

mon

thly

ret

urn

(%)

T-Stat=17

Chart 10: Ten-year risk vs. return of hedge funds (January 1996 – December 2005)

y = 0.13x + 0.53R2 = 0.12

-10

-8

-6

-4

-2

0

2

4

6

8

10

0 5 10 15 20 25 30

Standard deviation of monthly return (%)

Ave

rage

mon

thly

ret

urn

(%)

T-Stat=36

Charts 9 and 10 plot the five-year risk-return profiles of individual funds. There is a significant positive relationship between return and risk for all funds. However, the correlation between returns and risks is low, meaning there are other factors (such as management and strategies adopted, to name a few) that contribute to higher return of a hedge fund.

[ �� ]


We also compare the annualized return on hedge funds to the rate on one-year U.S. Treasury securities, in chart 11. It shows that the spread between the two returns has tended to narrow over the past 25 years, though the spread differs widely in some years. Moreover, chart 12 shows the 60-month rolling annualized return correlations between the CSFB Tremont hedge fund index and three other indices, namely equity, bond, and commodity indices. With the exception of the commodity index, the correlations have tended to increase significantly in recent years. This means that rather than being a good hedge to stock returns, hedge fund returns have recently tended to move more closely in line with them.

Chart 12: Five-year rolling correlation on 12-month returns (January 1998 – July 2006)

Chart 11: Declining hedge fund return and narrowing of spread over U.S. Treasury rate

Page 1

0

5

10

15

20

25

30

35

40

1981 1986 1991 1996 2001 2006

Spread between hedge fund return and U.S. Treasury rate

Annualized return of hedge funds

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Jan-98

Jul-9

8

Jan-99

Jul-9

9

Jan-00

Jul-0

0

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

CSFB Tremont Hedge Fund Index & S&P 500 Composite Index

0.89 as of July 31, 2006

CSFB Tremont Hedge Fund Index& Goldman Sachs Commodity Index

- 0.12 as of July 31, 2006

CSFB Tremont Hedge Fund Index& Lehman Brothers Global Bond Index

-0.56 as of July 31, 2006

[ �� ]


Chart 13: Performance of hedge funds vs. major benchmark indices(January 1995 – July 2006)

35

y y

50

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

CSFB/Tremont IndexDow Jones IndustrialMSCI Emerging MarketsMSCI World Capital MarketMSCI Europe $

Index, January 1995 = 100

The last set of charts, charts 13 and 14, compares the performance of hedge funds to major benchmark indexes over different time periods, using the aggregate return of the funds and the returns for funds employing different strategies. While these charts show that hedge funds have performed comparatively well over the different time periods, there are substantial differences in performance, depending on the strategies employed. Furthermore, no single strategy dominates over all the time periods examined.

[ �6 ]


35

Performance of Hedge Funds, 1994-1999

-50 0 50 100 150 200 25

CSFB Fremont

CSFB Investible

Convertible Arbitrage

Dedicated Short Bias

Distressed

Emerging Market

Market Neutral

Event Driven

ED Multi Strategy

Fixed Income Arbitrage

Global Macro

Multi-Strategy

Risk Arbitrage

Long/Short Equity

Managed Futures

Dow Jones Industrial

MSCI Emerging Market

Morgan Stanley Global Equity

MSCI Global

Percentage change in USD

n.a.

Performance of Hedge Funds, 2000-July 2006

0 50 100 150 200 25

CSFB Fremont

CSFB Investible



Distressed

Emerging Market

Market Neutral

Event Driven

ED Multi Strategy


Global Macro

Multi-Strategy

Risk Arbitrage

Long/Short Equity

Managed Futures




MSCI Global


Performance of Hedge Funds, 1994-July 2006

-100 0 100 200 300 400 50

CSFB Fremont

CSFB Investible



Distressed

Emerging Market

Market Neutral

Event Driven

ED Multi Strategy


Global Macro

Multi-Strategy

Risk Arbitrage

Long/Short Equity

Managed Futures




MSCI Global

Percentage change in USDPerformance of Hedge Funds, 2006

-2 0 2 4 6 8 10 12 1

CSFB Fremont

CSFB Investible



Distressed

Emerging Market

Market Neutral

Event Driven

ED Multi Strategy


Global Macro

Multi-Strategy

Risk Arbitrage

Long/Short Equity

Managed Futures




MSCI Global


Chart 14: Performance of hedge funds

[ �� ]


III. Some Statistical AnalysesA. Relationship Between the Returns and Selected Characteristics

of a Hedge FundA number of rigorous studies have examined hedge fund performance and risk in recent years.

Some of these studies, with information about their nature and principal findings, are listed in Appendix A. We do not attempt to provide a comparable study here. Instead our goal is a much more modest one: to exam the relationship between returns and selected characteristics of hedge funds.

In order to examine the relationship between selected characteristics of hedge funds and returns, risk-adjusted returns, and standard deviation of returns, we first determine and define a list of variables. Tables 51 and 52 provide definitions and pair-wise correlations for variables.

Code Description AGE Average age of fund as of December 2005

INFEE Incentive fees often range between 15 percent and 25 percent of net income exceeding either hurdle rate or high watermark.

INILOCK Initial lockup days is the longer of minimum initial lockup period or period between capital withdrawal or day required to give notice before withdraw.

LIFE9705 Life of funds (number of months, 1997–2005) MANFEE Management fees are based on assets under management. RTN9705 Average monthly return, 1997–2005 STDEV9705 Standard deviation of monthly returns, 1997–2005 ADJRTN10 Risk-adjusted average monthly returns from January 1995 to December 2005 ADJRTN3 Risk-adjusted average monthly returns from January 2003 to December 2005 ADJRTN5 Risk-adjusted average monthly returns from January 2001 to December 2005 ADJRTN7 Risk-adjusted average monthly returns from January 1999 to December 2005 LOG(ASSET10) Log of average fund assets from January 1995 to December 2005 LOG(ASSET3) Log of average fund assets from January 2003 to December 2005 LOG(ASSET5) Log of average fund assets from January 2001 to December 2005 LOG(ASSET7) Log of average fund assets from January 1999 to December 2005 LOG(ASSET9705) Log of average asset (1997–2005) RTN10 Simple average of monthly returns from January 1995 to December 2005 RTN3 Simple average of monthly returns from January 2003 to December 2005 RTN5 Simple average of monthly returns from January 2001 to December 2005 RTN7 Simple average of monthly returns from January 1999 to December 2005 STDEV10 Standard deviation of monthly returns from January 1995 to December 2005 STDEV3 Standard deviation of monthly returns from January 2003 to December 2005 STDEV5 Standard deviation of monthly returns from January 2001 to December 2005 STDEV7 Standard deviation of monthly returns from January 1999 to December 2005 D_LASA Dummy - Location of assets, Asia D_LEUR Dummy - Location of assets, Europe D_LGLO Dummy - Location of assets, global D_LOTH Dummy - Location of assets, other regions D_RASA Dummy - Region of domicile, Asia D_REUR Dummy - Region of domicile, Europe D_ROFF Dummy - Region of domicile, offshore D_ROTH Dummy - Region of domicile, other D_SEVD Dummy - Strategy, event-driven D_SFOFM+D_SFOF Dummy - Strategy, fund of funds D_SGLOB Dummy - Strategy, global D_SMAC Dummy - Strategy, macro D_SMN Dummy - Strategy, market-neutral

Table 51: List of variables

[ �� ]


Table 52: Correlations

AG

E

INFE

E

INIL

OC

K

LIF

E97

05

MA

NFE

E

RT

N97

05

STD

EV

9705

LO

G97

05

AD

JRT

N10

AD

JRT

N3

AD

JRT

N5

AD

JRT

N7

AGE 16526

INFEE -0.03*** 16078 9462

INILOCK -0.01 0.13*** 16427 9319 9856

LIFE9705 0.93*** 0.03*** 0.01 16526 9462 9856 10009

MANFEE -0.02 0.33*** 0 0.05*** 16263 9437 9532 9683 9683

RTN9705 -0.03** 0.09*** 0.08*** 0 0.04*** 16526 8803 9183 9320 9005 9320

STDEV9705 0.24*** 0.15*** 0.06*** 0.1*** 0.02* 0.35*** 16467 8731 9111 9247 8932 9247 9247

LOG9705 0.19*** -0.03*** -0.01 0.22*** 0.03*** 0.01 -0.24*** 15651 7827 8120 8246 7971 8246 8206 8246

ADJRTN10 0.07 0.03 -0.01 0.1** -0.04 -0.05 -0.14*** 0.05 1380 552 573 580 559 559 557 517 580

ADJRTN3 0.01 -0.02 0 0.02 0 -0.01 -0.06*** 0.02 0.67*** 12479 3243 3384 3441 3312 3292 3279 2937 580 3441

ADJRTN5 0.02 -0.04 -0.01 0.04** -0.02 -0.01 -0.08*** 0.06** 0.82*** 0.87*** 11395 1888 1977 2007 1938 1934 1924 1755 580 2007 2007

ADJRTN7 0 -0.05 0.01 0.04 -0.03 -0.04 -0.16*** 0.05 0.91*** 0.83*** 0.95*** 1678 926 964 977 941 945 941 869 580 977 977 977

LOG10 0.14** 0.01 -0.04 0.08* 0.03 -0.01 -0.05 0.18*** 0.36*** 0.25*** 0.29*** 0.35***328 469 489 494 476 480 478 463 494 494 494 494

LOG3 0.11*** 0 -0.03 0.08*** -0.04** 0 -0.03 0.23*** 0.4*** 0.14*** 0.26*** 0.31***2151 2869 2988 3038 2919 2911 2901 2757 493 3038 1795 853

LOG5 0.13*** -0.03 -0.03 0.1*** -0.03 0.01 -0.04* 0.22*** 0.39*** 0.15*** 0.23*** 0.3***1236 1696 1770 1797 1732 1738 1731 1646 494 1797 1797 854

LOG7 0.1** -0.02 -0.01 0.07** -0.05 0.01 -0.11*** 0.22*** 0.38*** 0.19*** 0.23*** 0.28***592 809 844 854 821 830 828 796 494 854 854 854

RTN10 -0.06 0.03 0.13*** 0.01 0.05 0.14*** 0.08* 0.01 -0.09** 0.07* 0.01 -0.06380 552 573 580 559 559 557 517 580 580 580 580

RTN3 -0.04** 0.04** 0.01 -0.04** 0.05*** 0.06*** 0.08*** -0.03 -0.2*** 0.13*** 0.01 -0.1***2479 3243 3384 3441 3312 3292 3279 2937 580 3441 2007 977

RTN5 -0.06** 0.07*** 0.02 -0.05** 0.04* 0.06*** 0.06** -0.01 -0.12*** 0.11*** 0.16*** 01395 1888 1977 2007 1938 1934 1924 1755 580 2007 2007 977

RTN7 -0.06 0.07** 0.09*** -0.02 0.05 0.18*** 0.15*** 0.02 -0.1** 0.09*** 0.05 -0.02678 926 964 977 941 945 941 869 580 977 977 977

STDEV10 -0.14*** 0.05 0.05 -0.09** 0.08** 0.07* 0.13*** -0.03 -0.63*** -0.37*** -0.45*** -0.57***380 552 573 580 559 559 557 517 580 580 580 580

STDEV3 -0.04* 0.1*** -0.01 -0.03* 0.08*** 0.03** 0.13*** -0.05** -0.53*** -0.25*** -0.34*** -0.44***2479 3243 3384 3441 3312 3292 3279 2937 580 3441 2007 977

STDEV5 -0.07*** 0.12*** -0.01 -0.07*** 0.05** 0.03 0.13*** -0.07*** -0.58*** -0.25*** -0.38*** -0.48***1395 1888 1977 2007 1938 1934 1924 1755 580 2007 2007 977

STDEV7 -0.06 0.11*** 0.01 -0.04 0.06* 0.09*** 0.22*** -0.03 -0.62*** -0.34*** -0.41*** -0.49***678 926 964 977 941 945 941 869 580 977 977 977

Note: ***, ** and * denote significant level at 1 percent, 5 percent, and 10 percent, respectively. The numbers in second line are the corresponding number of observations for pair-wise correlation.

[ �� ]


LOG10

LOG3

LOG5

LOG7

RTN10

RTN3

RTN5

RTN7

STDEV10

STDEV3

STDEV5

STDEV7

LOG10 1494

LOG3 0.95*** 1493 3038

LOG5 0.98*** 0.99*** 1494 1795 1797

LOG7 0.99*** 0.98*** 0.99*** 1494 853 854 854

RTN10 -0.09* -0.01 -0.03 -0.06 1494 493 494 494 580

RTN3 -0.14*** -0.06*** -0.1*** -0.13*** 0.65*** 1494 3038 1797 854 580 3441

RTN5 -0.14*** 0.02 -0.03 -0.08** 0.7*** 0.78*** 1494 1795 1797 854 580 2007 2007

RTN7 -0.11** 0.01 -0.03 -0.06* 0.86*** 0.77*** 0.82*** 1494 853 854 854 580 977 977 977

STDEV10 -0.33*** -0.34*** -0.35*** -0.34*** 0.53*** 0.53*** 0.53*** 0.54*** 1494 493 494 494 580 580 580 580 580

STDEV3 -0.29*** -0.24*** -0.27*** -0.26*** 0.39*** 0.6*** 0.48*** 0.44*** 0.86*** 1494 3038 1797 854 580 3441 2007 977 580 3441

STDEV5 -0.3*** -0.29*** -0.3*** -0.28*** 0.41*** 0.58*** 0.48*** 0.45*** 0.91*** 0.94*** 1494 1795 1797 854 580 2007 2007 977 580 2007 2007

STDEV7 -0.32*** -0.3*** -0.31*** -0.3*** 0.49*** 0.55*** 0.46*** 0.56*** 0.97*** 0.87*** 0.93*** 1494 853 854 854 580 977 977 977 580 977 977 977

Note: ***, ** and * denote significant level at 1 percent, 5 percent, and 10 percent, respectively. The numbers in second line are the corresponding number of observations for pair-wise correlation.

Table 52: Correlations, cont.

[ 60 ]


Tables 53–55 examine the relationship between selected characteristics of hedge funds and their returns, risk-adjusted returns, and standard deviation of returns. The return regressions show that there is a significantly positive relationship between the risk-adjusted returns and the asset size of funds (see table 53). Management fees, performance incentives, the length of the lockup period, and age of a fund are not related to risk-adjusted returns. The positive relationship between risk-adjusted returns and asset size appears to be solely due to the negative relationship between the standard deviation of returns and asset size (see table 55).

Table 53: The relationship between risk-adjusted returns andselected characteristics of hedge funds

3 Years 5 Years 7 Years 10 Years

C 0.4079*** 0.2433*** 0.2771*** 0.1947*** (0.0644) (0.0647) (0.0816) (0.0733)

LOG(ASSET3) 0.0544*** (0.0087)

LOG(ASSET5) 0.0669*** (0.0087)

LOG(ASSET7) 0.0772*** (0.0111)

LOG(ASSET10) 0.0714*** (0.0106)

MANFEE -0.0284 -0.0263 -0.0357 -0.0548* (0.0267) (0.0258) (0.0300) (0.0283)

INFEE -0.0028 -0.0017 -0.0046* 0.0005 (0.0019) (0.0019) (0.0024) (0.0022)

INILOCK -0.0001 -0.0001 0.0000 0.0000 (0.0001) (0.0001) (0.0001) (0.0001)

AGE05 0.0000 -0.0018 -0.0041 -0.0006 (0.0038) (0.0034) (0.0038) (0.0032)

R2 0.02 0.05 0.09 0.14 Adjusted R2 0.02 0.05 0.08 0.13 F-Stat 8.85 12.74 11.16 9.79 Number of Observations 1976 1135 550 307

Note: ***, ** and * denote significant level at 1 percent, 5 percent, and 10 percent, respectively. The numbers in parentheses are standard errors.

[ 6� ]


Table 54: The relationship between returns and selected characteristics of hedge funds


C 0.9766*** 0.7347*** 0.9299*** 1.0505*** (0.0902) (0.0994) (0.1286) (0.1264)

LOG(ASSET3) -0.0317*** (0.0121)

LOG(ASSET5) -0.0068 (0.0133)

LOG(ASSET7) -0.0164 (0.0174)

LOG(ASSET10) -0.0301 (0.0183)

MANFEE 0.0655* 0.0467 0.0651 0.0440 (0.0374) (0.0397) (0.0473) (0.0488)

INFEE 0.0023 0.0071** 0.0031 0.0022 (0.0027) (0.0030) (0.0038) (0.0038)

INILOCK 0.0002 0.0002 0.0005*** 0.0004*** (0.0001) (0.0001) (0.0002) (0.0001)

AGE05 -0.0117** -0.0146*** -0.0128** -0.0060 (0.0053) (0.0052) (0.0060) (0.0055)



[ 62 ]


Table 55: The relationship between standard deviation of returns and selected characteristics of hedge funds


C 2.7429*** 3.8725*** 4.9801*** 5.3591*** (0.2218) (0.3274) (0.5534) (0.6500)

LOG(ASSET3) -0.3208*** (0.0299)

LOG(ASSET5) -0.4781*** (0.0438)

LOG(ASSET7) -0.5938*** (0.0750)

LOG(ASSET10) -0.5826*** (0.0941)

MANFEE 0.3601*** 0.2022 0.2937 0.5081** (0.0918) (0.1306) (0.2035) (0.2508)

INFEE 0.0308*** 0.0503*** 0.0587*** 0.0353* (0.0065) (0.0098) (0.0163) (0.0194)

INILOCK 0.0000 0.0001 0.0003 0.0004 (0.0003) (0.0004) (0.0007) (0.0007)

AGE05 -0.0112 -0.0212 -0.0322 -0.0570** (0.0129) (0.0170) (0.0258) (0.0281)



[ 6� ]


B. Relationship Between the Likelihood of a Fund Being Alive and Its Characteristics

Our dataset allows us to examine the relationship between selected characteristics of a fund and its likelihood of being alive. To a very limited degree, this analysis provides information about the risks of individual funds. It does not, however, provide information about the more important issue of the likelihood of the collapse of several large or many medium-size hedge funds and the costs such a collapse would impose directly and indirectly on economies. Yet this is an important issue. As Schinasi (2006, p. 191) points out, “the turbulence surrounding the near-collapse of LTCM in the autumn of 1998 posed the risk of systemic consequence for international financial system and seems to have created consequence for real economic activity.” This topic clearly merits further study.

The results of our logit regression for the relationship between the likelihood of a fund being alive and selected fund characteristics are reported in table 56. They indicate the following:

1. The more volatile the return, the greater the likelihood of the fund not being alive.

2. The greater the average monthly returns over the period 1997 to 2005, the higher probability of a fund being alive.

3. The bigger the fund and the longer it has been in existence, the greater the probability that it will be alive.

4. Management fees and performance incentives are positively associated with the likelihood of a fund being alive.

5. The longer the initial lockup period, the greater the likelihood of a fund being alive.

6. Funds domiciled outside the United States and funds with assets invested outside the United States are associated with higher probability of being alive, even after controlling for different strategies that the funds employed.

[ 6� ]


Table 56: The relationship between the likelihood of a fund being alive and selected fund characteristics

(1) (2) (3) (4) (5) (6) C -1.0436*** -1.4829*** -2.0763*** -1.8219*** -2.1217*** -2.6305***

(0.1012) (0.1083) (0.1203) (0.1290) (0.1334) (0.1451) STDEV9705 -0.2277*** -0.2170*** -0.2018*** -0.2151*** -0.2049*** -0.1912***

(0.0113) (0.0114) (0.0121) (0.0116) (0.0117) (0.0124) RTN9705 0.3602*** 0.3502*** 0.3396*** 0.3678*** 0.3595*** 0.3443***

(0.0290) (0.0293) (0.0310) (0.0296) (0.0298) (0.0314) LOG(ASSET9705) 0.1875*** 0.1591*** 0.1295*** 0.1774*** 0.1536*** 0.1276***

(0.0158) (0.0162) (0.0172) (0.0161) (0.0165) (0.0174) LIFE9705 0.0114*** 0.0138*** 0.0184*** 0.0118*** 0.0139*** 0.0184***

(0.0009) (0.0010) (0.0011) (0.0009) (0.0010) (0.0011) MANFEE 0.6997*** 0.5957*** 0.4100*** 0.6635*** 0.5790*** 0.4276***

(0.0488) (0.0498) (0.0525) (0.0500) (0.0509) (0.0534) INFEE 0.0028 0.0111*** 0.0199*** 0.0336*** 0.0379*** 0.0409***

(0.0038) (0.0040) (0.0042) (0.0050) (0.0051) (0.0053) INILOCK 0.0006*** 0.0012*** 0.0013*** 0.0005*** 0.0011*** 0.0012***

(0.0001) (0.0002) (0.0002) (0.0002) (0.0002) (0.0002) D_ROFF 0.4218*** 0.3208***

(0.1060) (0.1085) D_RASA 1.3095*** 1.1980***

(0.2406) (0.2438) D_REUR 1.0528*** 0.9431***

(0.0753) (0.0767) D_ROTH 1.1737*** 1.0610***

(0.1991) (0.2042) D_LGLO 1.8986*** 1.8602***

(0.0713) (0.0742) D_LEUR 1.8832*** 1.8435***

(0.1394) (0.1419) D_LASA 2.5745*** 2.5180***

(0.1898) (0.1928) D_LOTH 0.6988*** 0.8347***

(0.1399) (0.1468) D_SLS 0.3695*** 0.2802*** 0.2996***

(0.0736) (0.0752) (0.0806) D_SFOFM+D_SFOF 0.9567*** 0.8428*** 0.6591***

(0.0881) (0.0898) (0.0942) D_SEVD -0.3791*** -0.3333*** -0.2096**

(0.0868) (0.0877) (0.0921) D_SGLOB 0.6003*** 0.3735** -0.0437

(0.1658) (0.1715) (0.1908) D_SMAC 0.3141** 0.2499 -0.4013**

(0.1498) (0.1520) (0.1637) McFadden R-squared 0.14 0.16 0.24 0.16 0.18 0.25 Probability(LR stat) 0.00 0.00 0.00 0.00 0.00 0.00 Number of observations 7649 7649 7649 7649 7649 7649 Number of live funds 4967 4967 4967 4967 4967 4967Note: ***, ** and * denote significant level at 1 percent, 5 percent, and 10 percent, respectively. The numbers in parentheses are standard errors.

[ 6� ]


IV. Conclusions

The hedge fund industry has grown rapidly in recent years, in both number and assets. Such funds represent an important alternative investment vehicle for wealthier and financially sophisticated investors. They also help improve the allocation of resources by seeking out exploitable inefficiencies in firms and markets throughout the world. Hedge fund returns have been relatively high over the years, but so too have been the risks. Indeed, the returns for some funds over the time periods examined have not compensated for their risk, compared to other hedge funds employing different strategies. Thus, investors face different risk-return tradeoffs when investing in funds employing different strategies. This, of course, should not a cause for alarm, given the sophistication of investors and lenders putting money into hedge funds.

The fundamental cause for concern about hedge funds is the degree to which they pose a systemic risk to the stability of financial markets and economic activity. No one knows the exact magnitude of this risk. Yet to the degree the industry has operated for years without causing serious disruptions in markets and economies, there would appear to be no need for introducing governmental regulation at this time. After all, investors can always show their displeasure by withdrawing their funds. And the banks lending to such funds, as well as the brokerages and accounting firms servicing them, can take appropriate action to impose greater market discipline on funds they suspect are taking on too much risk. In other words, the bottom line is: let investors beware.

[ 6� ]


V. References

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Agarwal, Vikas and Narayan Y. Naik (2000). “Performance Evaluation of Hedge Funds with Option-based and Buy-and-Hold Strategies,” Working Paper (August 2000) EFA 0373; FA Working Paper No. 300. Available at SSRN: http://ssrn.com/abstract=238708.

Agarwal, Vikas and Narayan Y. Naik (2004). “Risks and Portfolio Decisions Involving Hedge Funds,” The Review of Financial studies, Vol. 17, No. 1. 2004. pp. 63–98.

Brealey, Richard A. and Evi Kaplanis (2001). “Hedge Funds and Financial Stability: An Analysis of Their Factor Exposures,” International Finance ,Vol. 4, No. 2. (2001), pp. 161–187.

Brown, Stephen J., William N. Goetzmann, and James M. Park (1998). “Hedge Funds and the Asian Currency Crisis of 1997,” Yale School of Management Working Paper No. F-58 (May 13, 1998). Available at SSRN: http://ssrn.com/abstract=58650.

Brown, Stephen J., William N. Goetzmann, and Roger G. Ibbotson (1999). “Offshore Hedge Funds: Survival and Performance,” The Journal of Business ,Vol. 72, No. 1. (Jan. 1999), pp. 91–117.

Chan, Nicholas, Mila Getmansky, Shane Haas, and Andrew W. Lo (2005). “Systemic Risk and Hedge Funds,” National Bureau of Economic Research (NBER) Working Paper No. 11200.

Danielson, Jon, Ashley Taylor and Jean-Pierre Zigrand (2005). “Highwaymen or Heroes: Should Hedge Funds be Regulated?” Journal of Financial Stability, Vol. 1, No. 4, pp. 522–543.

Donaldson, William H. (2003). “The Long and Short of Hedge Funds: Effects of Strategies for Managing Market Risks,” Working Paper prepared for the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, United States House of Representatives.

Edwards, Franklin R. and Mustafa O. Caglayan (2000). “Hedge Funds and Commodity Fund Investment Styles in Bull and Bear Markets,” Journal of Portfolio Management, Vol. 27, No. 4, (2001), pp. 97–108.

Edwards, Franklin R. (2003). “The Regulations of Hedge Funds: Financial Stability and Investor Protection,” Working Paper prepared for the Conference on Hedge Funds Institute for Law and Finance / Deutsches Aktieninstitute. V. Johann Wolfgang Goethe-Univsersitat Frankfurt, May 22, 2003.

Eichengreen, Barry (1999). “The Regulator’s Dilemma: Hedge Funds in the International Financial Architecture,” International Finance, Vol. 2, No. 3. (1999), pp. 411–440.

[ 6� ]


Eichengreen, Barry and Donald Mathieson (1999). “Hedge Funds: What Do We Really Know?” 1999 International Monetary Fund, September 1999.

Financial Services Authority of UK (2005). “Hedge Funds: A Discussion of Risk and Regulatory Engagement,” Financial Services Authority of UK, Discussion Paper, June 2005.

Fung, William and David A.Hsieh (1999). “A Primer on Hedge Funds,”Journal of Empirical Finance, Vol.6, (1999), pp. 309–331.

Fung, William and David A. Hsieh (2000). “Measuring the Market Impact of Hedge Funds,” Journal of Empirical Finance, Vol. 7, (2000), pp. 1–36.

Fung, William, David A. Hsieh, and Konstantinos Tsatsaronis (2000). “Do Hedge Funds Disrupt Emerging Markets?” Brookings-Wharton Papers on Financial Services: 2000.

Garbaravicius, Tomas and Frank Dierick (2005). “Hedge Funds and Their Implications for Financial Stability,” European Central Bank, Occasional Paper Series No. 34, August 2005.

Geithner, Timothy F. (2006). “Hedge Funds and Derivatives and Their Implications for the Financial System,” Speech, Federal Reserve Bank of New York, September 15, 2006, http://www.ny.frb.org/newsevents/speeches/2006/gei060914.html.

Getmansky, Mila (2005). “The Life Cycle of Hedge Funds: Fund Flows, Size and Performance,” Working Paper, January 2, 2005, http://ssrn.com/abstract=676742.

Greenspan, Alan (2005). Remarks by Chairman Alan Greenspan, “Risk Transfer and Financial Stability,” the Federal Reserve Bank of Chicago’s Forty-first Annual Conference on Bank Structure, Chicago, Illinois, May 5, 2005.

Kaminsky, Graciela L., Richard K. Lyons, and Sergio L. Schmukler (2001). “Mutual Fund Investment in Emerging Markets: An Overview,” The World Bank Economic Review, Vol. 15, No. 2. (2001), pp. 315–340.

Kat, Harry (2003). “10 Things That Investors Should Know About Hedge Funds,” The Journal of Wealth Management, Spring 2003, pp. 72–81.

Kim, Woochan and Shang-Jin Wei (2002). “Foreign Portfolio Investors Before and During a Crisis,” Journal of International Economics, Vol. 56, (2002), pp. 77–96.

Lhabitant, Francois L. (2004). “Hedge Funds Investing: A Quantitative Look Inside the Black Box,” Working Paper, EDHEC Risk and Asset Management Research Center, EDHEC Business School, April 2004.

Liang, Bing (2000). “Hedge Funds: The Living and the Dead,” The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3. (Sept., 2000), pp. 309–326.

Lo, Andrew (2001). “Risk Management For Hedge Funds: Introduction and Overview,” Financial Analysts Journal, Vol. 57, No. 6, (November/December 2001).

[ 6� ]


Lumpkin, Stephen and Hans J. Blommestein (1999). “Hedge Funds, Highly Leveraged Investment Strategies and Financial Markets,” Financial Market Trends, No. 73. (June 1999), pp. 27–50.

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Schinasi, Garry J. (2005), “Safeguarding Financial Stability: Theory and Practice,” Washington D.C.: International Monetary Fund, 2005.

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Yam, Joseph CK (1999). “Capital Flows, Hedge Funds and Market Failure: A Hong Kong Perspective,” Working Paper prepared for Reserve Bank of Australia 1999 Conference, “Capital Flows and the International System,” August 9–10, 1999.

[ �� ]


VI. AppendixA

utho

rsD

ata

Sour

ceT

ime

Per

iod

Num

ber

ofH

edge

Fun

dsT

otal

Fun

dA

sset

s(U

S$bi

llion

s)R

esul

ts/F

indi

ngs

Cha

n,G

etm

ansk

y,H

aas

and

Lo

(200

5)

TA

SS,C

SFB

/Tre

mon

t,A

ltves

t, C

RSP

, and

Y

ahoo

!Fin

ance

Feb.

1977

-A

ug.2

004

4,53

639

1.0

Bec

ause

ofda

taun

avai

labi

lity,

"we

cann

otde

term

ine

the

mag

nitu

deof

curr

ents

yste

mic

risk

with

any

degr

eeof

accu

racy

."

Gar

bara

vici

usan

dD

ieri

ck(2

005)

TA

SS19

90-

2004

3,26

446

3.0

"Iti

sve

ry d

iffi

cult

topr

ovid

ean

yco

nclu

sive

evid

ence

on

the

impa

ctof

hedg

efu

nds

onfi

nanc

ialm

arke

ts,w

hich

isat

leas

tpa

rtia

llydu

eto

the

lack

ofgo

odda

ta."

Get

man

sky

(200

5)T

ASS

Jan.

1994

-D

ec.2

002

3,50

1n.

a.

"[I]

tis

show

nth

atas

the

hedg

efu

ndca

tego

rybe

com

esm

ore

favo

rabl

e,m

ore

hedg

efu

nds

ente

rsu

ch a

cat

egor

y,th

usin

crea

sing

com

petit

ion

…",

soth

atth

e".

..liq

uida

tion

prob

abili

tyof

hedg

efu

nds

inth

atca

tego

ryin

crea

ses.

"

Mal

kiel

and

Saha

(200

5)T

ASS

Apr

.200

42,

065

n.a.

"…he

dge

fund

sha

vere

turn

slo

wer

than

com

mon

lysu

ppos

ed…

"an

d"a

lthou

ghth

efu

nds

tend

toex

hibi

tlow

corr

elat

ions

with

gene

rale

quity

indi

ces…

are

extr

emel

yri

sky

alon

g an

othe

rdi

men

sion

…"

Aga

rwal

and

Nai

k(2

004)

HFR

and

CSF

B/T

rem

ont

Jan.

1990

-D

ec.2

001

n.a.

n.a.

Ala

rge

maj

ority

ofhe

dge

fund

sca

rry

a si

gnif

ican

t am

ount

ofsy

stem

icri

sk.U

nder

stan

ding

the

risk

expo

sure

of

hedg

efu

nds

isim

port

antb

utth

eypr

ovid

elim

ited

info

rmat

ion.

Lha

bita

nt(2

004)

TA

SS,A

ltves

t,H

FR,a

ndM

AR

Jan.

1994

-O

ct.2

000

2,93

4n.

a.D

evel

ops

am

odel

that

"…de

term

ines

the

expo

sure

sof

a

hedg

efu

ndto

seve

rali

nves

tmen

tsty

les.

"

Bre

aley

and

Kap

lani

s(2

001)

TA

SSJa

n.19

94-

Sept

.199

912

8n.

a.

The

risk

of th

e av

erag

e he

dge

fund

isbr

oadl

yco

mpa

rabl

ew

ithth

atof

the

U.S

.equ

itym

arke

t,th

eex

tent

tow

hich

hedg

efu

nds

are

likel

yto

impa

cta

part

icul

arm

arke

tis

limite

dby

the

hete

roge

neou

sna

ture

ofth

ese

fund

s.

Lo

(200

1)A

lpha

Sim

plex

Gro

upJa

n.19

96-

Nov

.199

9n.

a.n.

a.D

iscu

sses

the

need

for

new

ana

lytic

s be

yond

Val

ue-a

t-R

isk.

Aga

rwal

and

Nai

k(2

000a

)H

FRJa

n.19

82-

Dec

.199

874

6n.

a.P

ersi

sten

cein

perf

orm

ance

ishi

ghes

tatt

hequ

arte

rly

hori

zon

and

decr

ease

sas

one

mov

es to

the

year

lyho

rizo

n.A

lso,

pers

iste

nce

is u

nrel

ated

to th

e fu

nd s

trat

egy.

Aga

rwal

and

Nai

k(2

000b

)H

FRJa

n.19

90-

Oct

.199

858

6n.

a.L

ever

aged

fund

sdo

notn

eces

sari

lype

rfor

mbe

tter

orw

orse

com

pare

dto

fund

sth

atdo

notu

sele

vera

ge.

App

endi

x A

: L

iter

atur

e R

evie

w

[ �2 ]


Aut

hors

Dat

a So

urce

Tim

e Pe

riod

Num

ber

of H

edge

Fund

sT

otal

Fun

d A

sset

s (U

S$ b

illio

ns)

Res

ults

/Fin

ding

s

Edw

ards

and

Cag

laya

n (2

000)

MA

RJa

n. 1

990

- A

ug. 1

998

4,01

017

5.0

"[H

]edg

e fu

nds'

retu

rns a

re g

ener

ally

neg

ativ

e in

bea

r m

arke

ts a

nd a

lmos

t all

styl

es e

xhib

it si

gnifi

cant

ly h

ighe

r po

sitiv

e co

rrel

atio

n w

ith st

ock

retu

rns i

n be

ar m

arke

ts th

an in

bu

ll m

arke

ts."

Fung

and

Hsi

eh (2

000)

TASS

, MA

R, I

FN S

uiss

e,

inte

rnet

info

and

priv

ate

sour

ces

July

198

2 -

Feb.

199

841

64.0

"The

re w

as n

o ev

iden

ce th

at h

edge

fund

s wer

e ab

le to

m

anip

ulat

e m

arke

ts a

way

from

thei

r 'na

tura

l pat

hs' d

riven

by

econ

omic

fund

amen

tals

… H

edge

fund

s' ac

tiviti

es m

ay se

rve

as a

lead

ing

indi

cato

r of m

arke

t tur

moi

l."

Fung

, Hsi

eh, a

nd T

sats

aron

is

(200

0)

TASS

, MA

R, I

FN S

uiss

e,

inte

rnet

info

and

priv

ate

sour

ces

1997

2755

.5H

edge

fund

s did

not

cau

se th

e 19

97 A

sian

cur

renc

y cr

isis

.

Lia

ng (2

000)

HFR

and

TA

SS19

93 -

1998

2,78

927

0.0

"…fu

nds d

ispl

ay d

eclin

ing

retu

rns t

owar

d th

e da

te o

f liq

uida

tion…

" an

d "…

poor

per

form

ance

is th

e m

ain

reas

on

for l

iqui

datio

n."

Ack

erm

ann,

McE

nally

, and

R

aven

scra

ft (1

999)

MA

R a

nd H

FRJa

n. 1

994

- D

ec. 1

995

547

59.1

Des

pite

thei

r adv

anta

ge o

ver m

utua

l fun

ds, h

edge

fund

s are

un

able

to c

onsi

sten

tly b

eat t

he m

arke

t whe

n ab

solu

te o

r ris

k-ad

just

ed re

turn

s are

use

d.

Bro

wn,

Goe

tzm

ann,

and

Ib

bots

on (1

999)

The

U.S

. Off

shor

e Fu

nds

Dire

ctor

y19

89 -

1995

399

40.3

"Off

shor

e fu

nds a

s a g

roup

hav

e po

sitiv

e ris

k-ad

just

ed

perf

orm

ance

…"

as d

o al

l but

one

of 1

0 ba

sic

styl

es. N

ot

"muc

h ev

iden

ce o

f diff

eren

tial m

anag

er sk

ill."

Lum

pkin

and

Blo

mm

este

in

(199

9)V

an H

edge

Fun

d A

dvis

ors

1997

5,50

029

5.0

Gen

eral

bac

kgro

und

mat

eria

l.

Bro

wn,

Goe

tzm

ann,

and

Par

k (1

998)

TASS

and

PA

MSe

pt. 1

993

- Se

pt. 1

997

1029

.0Li

ttle

evid

ence

sugg

ests

that

hed

ge fu

nd m

anag

ers a

s a g

roup

ca

used

the

Asi

an C

urre

ncy

Cris

is o

f 199

7.

App

endi

x A

: L

iter

atur

e R

evie

w, c

ont.

[ �� ]


VII. About the Authors

Glenn Yago is Director of Capital Studies at the Milken Institute. He specializes in financial innovations, financial institutions and capital markets, and has analyzed public policy and its relation to high-yield markets, initial public offerings, industrial and transportation concerns, and public and private sector employment. Before coming to the Institute, Yago was director of the Center for Capital Studies in New York, which he founded in 1992 to develop insight into the process of capital access and ownership change. He was a faculty member of the City University of New York Graduate Center Ph.D. Program in Economics, and a senior research associate at the Center for the Study of Business Government at Baruch College, City University of New York. He has held the positions of faculty fellow at the Rockefeller Institute of Government, director of the Economic Research Bureau at the State University of New York at Stony Brook, and associate professor of management at Stony Brook’s Harriman School for Management and Policy.

James R. Barth is the Lowder Eminent Scholar in Finance at Auburn University and a Senior Fellow at the Milken Institute. His research focuses on financial institutions and capital markets, both domestic and global, with special emphasis on regulatory issues. Most recently, he served as leader of an international team advising the People’ Bank of China on banking reform. Barth was an appointee of Presidents Ronald Reagan and George H.W. Bush as chief economist of the Office of Thrift Supervision until November 1989, and has previously served as the chief economist of the Federal Home Loan Bank Board. He has also held the positions of professor of economics at George Washington University, associate director of the economics program at the National Science Foundation, and Shaw Foundation Professor of Banking and Finance at Nanyang Technological University. He has been a visiting scholar at the U.S. Congressional Budget Office, the Federal Reserve Bank of Atlanta, the Office of the Comptroller of the Currency, and the World Bank. He is a member of the Advisory Council of George Washington University’s Financial Services Research Program. Barth is the co-author of Rethinking Bank Regulation: Till Angels Govern (Cambridge University Press, 2006) and co-editor of Financial Restructuring and Reform in Post-WTO China (Kluwer Law International, 2007).

Tong Li is a Senior Research Analyst at the Milken Institute. Her research interests include financial institutions, microfinance, banking regulation, and economic development. Prior to joining the institute, she was an instructor for several upper-division economics courses at the University of California, Riverside. In June 2005, Li earned her Ph.D. in economics with a concentration in development economics and econometrics from the University of California, Riverside, where she also received her M.S. degree in 2002. She received her B.A. degree in international finance from Peking University in 2000.

Triphon Phumiwasana is a Research Economist at the Milken Institute. His research focuses on banks, non-bank financial institutions, capital markets, banking regulation, corporate governance and economic development with special emphasis on global issues. Phumiwasana has regularly co-authored a number of Milken Institute publications, including policy briefs and articles in The Milken Institute Review. His research has also been featured in Financial Markets, Institutions and Instruments Journal, MIT Sloan Management Review and Regulation of Financial Intermediaries in Emerging Markets Sage Publications, 2005). Phumiwasana earned his Ph.D. in economics with a concentration in international money and finance from Claremont Graduate University.

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