When writing a book on hedge funds, the inevitable questions are: “Where to begin?” and “What to include?” It’s not an easy task, yet Franc ̧ois-Serge manages to accomplish the difficult, even the near-impossible. Writing a book that provides an in-depth quantitative approach to hedge funds that is simultaneously accessible to the practitioner and robust enough for the academic, is a balancing act rarely achieved.
As both an investor in hedge funds as well as a sometimes researcher of their empirical impact on portfolio management, I fall someplace in between the practitioner and the academic. Therefore, it is a relief to me to have a textbook that can bridge both worlds of hedge fund management. This book is both suitable as an introduction to the risks and benefits of hedge fund investing as well as a reference book for the empirical analysis of those risks and benefits.
Each chapter holds value to the end user, but allow me to select a few chapters that have par- ticular importance to the investor. Chapter 5, Databases, Indices and Benchmarks; Chapter 8, Asset Pricing Models; and Chapter 11, Strategic Asset Allocation are critical to the key decision of how much of an investment portfolio to allocate to hedge funds. It is important for investors to note that there is no complete database of the hedge fund universe. The composition of hedge fund indices varies greatly. Furthermore, hedge fund benchmarks are rife with data biases. Consequently, the asset allocation decision can vary greatly based on the simple choice of the hedge fund benchmark. Chapter 5 provides an excellent dissertation of the problems of hedge fund index construction as well as a great overview of the various hedge fund indices available to investors.
Chapter 8 provides a comprehensive review with respect to an ongoing quest for academics and investors alike: trying to quantify the returns from hedge fund managers into an asset pricing model. Many researchers have approached this topic from many different directions. The author provides a complete review of both linear and non-linear models as well as single and multi-factor models. The science of hedge fund asset pricing is still developing, but Franc ̧ois-Serge’s summary is state of the art.
Chapters 5 and 8 then dovetail nicely with Chapter 11 on asset allocation. Every investor in hedge funds must sooner or later face the question of: “How much to invest?” Most investors use a mean–variance approach to asset allocation. However, as demonstrated in Chapter 8, hedge fund returns can be distinctly non-normal. Therefore, in Chapter 11, the author providesalternative methods to the mean–variance approach for determining the optimal allocation to hedge funds.
Throughout the book, Franc ̧ois-Serge provides numerous examples to highlight his points. Nothing is left to guesswork by the reader – every critical equation is spelled out and demon- strated by an example. While the book is sometimes quantitative, the math is not burdensome. Further, the numerous examples help to alleviate this burden. I enjoyed reading this book, and I look forward to using a copy of it as a handy reference to chart my way through the hedge fund universe.