Through the Alpha Smoke Screens: A Guide to Hedge Fund Return Sources

Make sure you understand how the various hedge fund strategies make money and are able to use this understanding to improve your investment process into hedge funds. One of the clearest and most readable discussions of hedge fund strategies you will ever see!

Essential reading for all financial professionals who work with or allocate assets to hedge funds, including private and institutional investors, fund of funds managers, hedge funds managers themselves, brokers, administrators and custodians. Also helpful to anyone addressing the challenges of hedge funds, including traditional asset managers, financial analysis, consultants and advisors.

Topics covered in this book include:

• The issue of return sources and the relationship of returns to systemic risk.
• Looking through the smoke screen of the search for Alpha to fully evaluate the nature, risks and return profiles of individual hedge fund strategies. 
• How investors can cut through the myths and misunderstandings that surround hedge funds by understanding return sources.
• Explains how most strategies earn much of their returns by assuming risks that can be readily analyzed and understood by investors.

Comments from readers:

  "Consensus thinking on hedge funds still varies between considering them to be a new paradigm in asset management and being the cause of the next investment bubble. Lars Jaeger (again) successfully steers away from marketing talk, stereotypes and oversimplifications. His analysis is precise, the argument well balanced, and the message crystal clear and of high-intellectual integrity."

Alexander M. Ineichen - CFA, CAIA, MD, UBS Investment Research, (Author of Absolute Returns)

"The author provides an excellent and in-depth examination of the hedge fund industry. Risk-return properties of hedge fund strategies, portfolio management and benchmarking hedge fund performance is meticulously addressed. This volume is sure to be a classic among hedge fund books. Anyone interested in hedge funds will greatly appreciate and benefit from the cutting edge research Lars has done in this volume. In essence, one can simply call this a handbook on hedge funds which belongs in everyone's book collection. Lars has done it again with a gem of a book."

Dr. Greg N. Gregoriou - Assistant Professor of Finance and Coordinator of Faculty Research at State University of New York (Plattsburgh)

Table of Contents

About the author
Foreword
Preface


Chapter 1: Introduction
Why this book was written
The challenges of understanding hedge funds
Who can benefit from this book?
How the book is different
How the book is structured

Review

Book Review by Dr Patrick Welton, Welton Investment Corporation (featured in AIMA Journal Winter 2005).

The surging use of hedge funds over the past ten years has left in its wake various levels of confusion and misconception that those of us actively working in the field routinely encounter.  Finally, here is a concise authoritative guide to this broad area of alternative investments written with a clear intellectual synthesis that will serve those seeking to learn more for years to come.

In his new book, Through the Alpha Smoke Screens: A Guide to Hedge Fund Return Sources, published by Institutional Investor Books, Dr Lars Jaeger sets the tone and outlines the purpose of his work with a focused address to the reader on why the book was written.

In this section, the author accurately identifies that even among skilled and experienced investment professionals few really understand how most classes of hedge funds make money.  He then states: “Only through a clear understanding of hedge fund return sources and risk characteristics can portfolio managers and investors make informed decisions about how hedge funds fit into their portfolios.  The purpose of this book is to explain hedge funds and their return sources as simply and clearly as this complex subject permits.” The author and publisher are to be complimented for just how well this purpose has been achieved, and just how well-suited the work is to its intended audience.

The book is relatively short (209 pages with references) and is clearly organised into ten chapters divided into between six and 12 sections each.  The reader will find very few symbolic mathematical treatments, but widespread use of charts and relational graphics, and at the end of each chapter a thorough, well-cited reference list.  Serious study of the text will reveal Dr Jaeger’s impressive depth of understanding of how the risk premia available in the global financial markets are synthesised and consolidated, the practices of capturing those return sources among the myriad of hedge fund manager styles, and the differing risk characteristics that result.

The concise treatment of the material in each section both conveys this information clearly to a wider audience, yet provides the comprehensive reference support desired by anyone seeking original source material to pursue any topic further.

The book devotes a lot of space to practical issues such as understanding the range of alternative investments, and the bewildering array of hedge fund naming taxonomies (pages 50-53 present a well-displayed view of the conditional returns and correlations of various hedge fund investment styles to stock and bond performance).  Two full chapters (12 sections) near the end are devoted to the practical application of the material to hedge fund portfolio management and benchmarking issues.

Beyond this, however, readers who are already finance professionals or students of the markets, from academic to trading, will delight in the education they will find themselves absorbing as they move through the middle sections of the book.

Early in the text, the authors makes a statement that is easy to overlook: “Because hedge fund returns derive from the underlying financial markets in which they operate, the book will also discuss the role of hedge funds in the overall world of capital markets.  Understanding the role and return sources of hedge funds also opens a door to a deeper understanding of financial markets.”

The prescience and truth of this observation will evidence itself as the reader examines many of the exhibits (such as 6.4, showing a simplified model for hedge fund and traditional fund return sources; 6.12 depicting the universe of risk premia in capital markets; or 7.6, which summarises exposure to systematic risk factors for various hedge fund strategies).

The text and surrounding data in these chapters stitch together into a single cloth an enduring framework for understanding the available sources of hedge fund returns and the risks that accompany them.

As I reflected upon this book, I reviewed the shelves full of nearly 300 finance titles in my library, and would rank this work clearly among the top tier for staying true to its purpose and for the value of the author’s expertise in synthesising his subject matter for the reader’s benefit.  The quality of the content and approach will undoubtedly result in multiple future printings of this book.  When this occurs, my hope would be that many of the graphs and relational figures will be depicted in colour by the publisher to further aid the reader in receiving the full benefit of the author’s consolidation of such wide ranging data into straightforward views.

In the concluding paragraphs of the book, the author reflects on the benefits of better understanding for the potential hedge fund investor.  He then makes several observations on the effects hedge funds have had and will have on the capital markets and on traditional managers that are worth sharing here.

Looking forward, he notes: “Hedge funds will exert a broader intellectual influence on world financial markets, the academics who study those markets and the practitioners who trade in them.  The traditional asset management industry will learn from hedge funds and will adopt and incorporate some of the investment strategies and techniques.  Indeed, hedge funds have already started a new way of thinking in global asset management”.

Related Titles

• Indian Financial Markets Directory 2009 »
• Profitable Socially Responsible Investing? An Institutional Investor's Guide »
• ETFs: A Guide To Exchange-Traded Funds (2003) »
• Distressed Debt »
• ETFs - In Focus »
• Turnaround Management II: A Guide To Corporate Restructuring »

Digital Products  £$€