My 19th invited lecture on hedge fund industry, the London Business School January 2022.

1. Hedge Funds:
Evidence & Data
Dr Drago Indjic
dindjic@raf.rs
London Business School (19th) E416
7 January 2022

2. Content
• Principles 3-5
• Performance and size 6-10
• Business 11-14
• Data 15-20
• Investment Practice 21-24
• Conclusions 25-26
• Bonus material 27-37

3. Industrial Organisation
• Investment industry
• Commodity/Product: “Alpha”, investment fund
• Market size, growth, distribution
• Characteristics: regulation, costs, labelling, safety,
consumer choice, selection, deployment …
• Demand: discerning clients
• Alternative, delegated investment strategies
• Supply: private, non-corporate businesses
• Micro/SME; owned by craftsman, management
• Incentives: entrepreneurship, mechanism design

4. Pricing Investment Talent
• Cost: from nil for ETFs to ∞ for private, closed funds

5. Post-2008 Regime
• Banking career exit strategy
• Apr 2014: USA Volcker Rule s. 619 Dodd-Frank’s
Act proprietary trading ban
• An ex-banker can become an entrepreneur,
– funding and managing the venture, raising assets
• Regulatory and market headwinds
• High client risk aversion → less seed capital
• Safer products ↔ higher business costs, clearing fees
• Less leverage, cross-asset inflation yet limits to passive

6. Hello 2020s

7. Post-2007 Performance
• Data: Eurekahedge EHFI251 (equally weighted index)

8. Industry Size
• AUM: $4.5tn, 2021Q3 (Barclay)
– +$1tn YoY
• ~7% of mutual funds AUM
• <ETF (in 3 firms); ~ money mkt funds, Top 3 SWFs
• <Blackrock $9.5tn, Vanguard $7.2tn; AQR $143b
• $456b SPDR SPY ETF, 9 bps, 1.2% yield
• Innovative and more regulated than ever
• Not a systemic risk

9. Self-Charged Innovation
• No need for net inflows, unlike crypto (BTC etc)
• Beta ~0

10. Business Demographics
• 3Q20-3Q21: 676 born, 132 died

11. Economics
• Demand for “cheap, liquid, Alpha”
– Prof. Fung: at what price? Capital formation?
– Intermediaries (advisors, FoF etc)
• Addressing fund market imperfections but layering
fees; down to 5% of industry AUM from peak 1/3
• Supply: market inefficiencies
– Hedge fund managers as innovators; never
too big to fail: LTCM; Pelaton
– Saviors: CTA: Mar 2020; +15% (2008)

12. Demand
• Mainstream: institutional investors
– Strategic asset allocation
– Diversified growth → %alternatives (PE, RE) →
% HFs → % ”strategies” → managers
• Classic: offshore investors
– “An investor domiciled in X buys into fund domiciled in
jurisdiction Y”
– KYC, 5AML, GACTA, PEP … ± 5k super-yachts
• New: retail investors
– Contemporary fund structures: UCITS, AIF

13. Supply: Fund Managers
• Start-up ventures, not (listed) companies
• Manager(s) ↔ Founders-owners; micro-enterprise
• Cash-flow, marketing sensitive
• Approved personnel in the regulated entity
• On-shore, taxed, more transparent; UK: authorised
by FCA, LLP (private agreements); staff, systems,
service contracts
• Off-shore Ltd, authorised by (e.g.) Guernsey FSC,
manages untaxed off-shore fund: corporate
“substance” and governance (NEDs)

14. Micro-Enterprises
• Owner/Manager’s business
• Staff <10: even the largest are still SMEs
• Median “fund” AUM <$50m, 1.1% fee
• Far less profitable business today; much higher
cost of seed capital
• Very few long-term survivors, “brands”
• Most new funds liquidated within 5 years - not
unlike any other start-up venture elsewhere
• Top 100 hedge funds AUM $1,8 tn (Jan 2021)

15. Bloomberg Data
• .

16. Performance Data
• Low data quality
• Vendors: HFR, Barclays, (Refinitiv, Morningstar)
• “boiler plate” + contact details
• Volunteered, self-reported performance estimates
(% ≠ NAV) for some fund share classes
• No standard fund identifiers (ISIN)
• Non-standard fund settlement; fund administrators
do not sell data
• Short time series; the largest/smallest/“defunct”
funds excluded – nb: survivorship bias

17. Strategy Labelling
• What exactly is an investment strategy?
• Descriptive taxonomies est. 1980s (!)
– No certification or labelling standards; elicited
by interviews and case studies
• Exposures vary across assets and time
• not all are hedged, or “absolute returns”
• Transparency: necessary, not sufficient

18. Classification Scheme(s)
• .

19. “Strategies”
• “Multi” 10%
multi-”
• “other”=3%
•
• and can change

20. Not Available as ETF
• Risk premia
– Volatility
– Events
– …
• Exotic payoffs
– Hedged
– Market neutral
– …

21. FoF Construction
• Top-down: “Strategy allocation” %
• Bottom-Up: “Fund selection”
• Portfolio risk weighting, vol control
– Rebalance wrt redemption liquidity terms

22. Case Study: CTA Exposure
• Choice: a fund, index fund or the alt Beta?
– Capacity? Fees? Influence? Brand: Winton vs AQR vs Palomar?

23. Data Quality
• Funds reference data (cheap)
• Offering memorandum, regulatory filings
• Business data (expensive)
• Due diligence: references, accounts, manager’s
own investment … private, lagged, stale
• Risk data (…)
• (weekly) NAVs → portfolio exposure and
(sometimes) holdings [→ real time: managed
accounts] – dare to overlay, hedge?

24. Practice
• Total risk management: exposure format
• Market, liquidity, operational - business venture
• Direct
• Fund Platforms
• Advised, non-discretionary: consultants (e.g.
Aurum, Albourne); outsourcing due diligence
• Segregated Managed Account
• Indirect
• Funds of funds
• Extinct: structured, capital protected fund notes

25. Perspective
• “Stay rich” during NIRP, pandemics etc
• Unique risk premia
– Zero Beta; NAV in gold or oil
• Negotiable investment and control terms
• Innovate, incubate, contract better

26. Bibliography
• Data: @HFRInc, Barclays;
• News: many
• Reports: Opalesque Roundtables
• Trade association: AIMA

27. Q&A
• Usual disclaimers apply ☺