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CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition by Hossein Kazemi, Keith H. Black, Donald R. Chambers, Mark J. P. Anson, CAIA Association

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CHAPTER 12

Hedge Fund Returns and Asset Allocation

Before investors enter the hedge fund world by forming a portfolio of hedge fund investments, they should have a plan of action to ensure the greatest opportunity for success. This chapter includes a quantitative overview of hedge fund investing, seeking to enumerate the risks and returns of hedge funds and describe how hedge fund investments may affect investor portfolios. In this chapter, the focus is on the risk and return characteristics of hedge funds. Subsequent chapters describe strategies in depth, including macro, event-driven, relative value, equity hedge funds, and funds of funds.

The goal of this chapter is to overview the process of designing and implementing a hedge fund program. A hedge fund program is the processes and procedures for the construction, monitoring, and maintenance of a portfolio of hedge funds. The chapter begins by providing an overview of available funds and strategies.

12.1 DESCRIBING THE HEDGE FUND UNIVERSE

Exhibit 12.1 shows an empirical summary of hedge fund risks and returns.

EXHIBIT 12.1 Hedge Fund Return Analysis—January 1990 to December 2010

Table 12-1

It is essential to understand that the dispersion-related statistics in Exhibit 12.1 reflect dispersion through time of returns that have been averaged cross-sectionally. For example, consider the standard deviation of the macro funds group, which is ...

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