ffirs_hedges.qxd 8/30/04 11:53 AM Page i Hedges on Hedge Funds ffirs_hedges.qxd 8/30/04 11:53 AM Page ii John Wiley & Sons Founded in 1807, John Wiley & Sons is the oldest independent publishing com- pany in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk man- agement, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. ffirs_hedges.qxd 8/30/04 11:53 AM Page iii Hedges on Hedge Funds How to Successfully Analyze and Select an Investment JAMES R. HEDGES IV John Wiley & Sons, Inc. ffirs_hedges.qxd 8/30/04 11:53 AM Page iv Copyright © 2005 by James R. Hedges IV. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. 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Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data Hedges IV, James R., 1967–. Hedges on hedge funds : how to successfully analyze and select an investment / James Hedges. p. cm. Includes index. ISBN 0-471-62510-8 (cloth) 1. Hedge funds. I. Title. HD4530.H3884 2005 332.64′5—dc22 2004011591 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 ffirs_hedges.qxd 8/30/04 11:53 AM Page v To Lundy, Evans, and Malone ffirs_hedges.qxd 8/30/04 11:53 AM Page vi ftoc_hedges.qxd 9/1/04 2:31 PM Page vii Contents Foreword ix Preface xiii Acknowledgments xxi CHAPTER 1 The Hedge Fund Alternative 1 CHAPTER 2 Cutting through the Black Box: Transparency and Disclosure 23 CHAPTER 3 The Operational Risk Crisis 43 CHAPTER 4 Best Practices in Hedge Fund Valuation 53 CHAPTER 5 Does Size Matter? 65 CHAPTER 6 Directional Investing through Global Macros and Managed Futures 75 CHAPTER 7 Profiting from the Corporate Life Cycle 93 vii ftoc_hedges.qxd 9/1/04 2:31 PM Page viii viii CONTENTS CHAPTER 8 Evaluating Arbitrage and Relative Value Strategies 111 CHAPTER 9 The Time Is Now for Equity Market Neutral 133 CHAPTER 10 Long-Short Strategies in the Technology Sector 143 CHAPTER 11 The Expansion of European Hedge Funds 151 CHAPTER 12 The Dynamic World of Asian Hedge Funds 167 CHAPTER 13 Hedge Fund Indices: In Search of a Benchmark 187 GLOSSARY 199 ABOUT THE AUTHORS 217 INDEX 221