All About Hedge Funds: A Monkey's Review

Happy 2012, monkeys! I’m very pleased to return to a more regular posting schedule, and for a return to the Monkey’s Review series. There’s a potential collaboration with Kenny Powers CFA in the works as well, and we hope you will continue to enjoy these.

The first Monkey’s Review of 2012 is partly a response to a common thread question: “What is a good recommended book to learn about [industry topic x]?” For those of us looking to gain a high-level understanding of hedge funds and private equity, “All About Hedge Funds” is a pretty good place to start. It’s required reading for a certification that I’m studying for, and I can comfortably recommend it for the business student.

Like most finance books published before 2008, a lot of the trend analysis is a bit outdated (in 2003 when it came out, GE was still the biggest American company by market cap). But that doesn’t stop the author from laying out an excellent critique of the efficient markets theory, laying out the case and explaining what is true (there are no free lunches) and what is false (investors are totally unaffected by emotion) about it. There are also well-explained chapters about the legal structure of hedge funds and the differences between them and mutual funds. The largest section is called “The Menu of Hedge Fund Strategies” and really starts to lay out how hedge funds profit in different market environments; i.e., what markets are best for the distressed debt investors, the contrarian investors, the short sellers, etc.?

Don’t throw out your finance textbooks yet, though. Here, unfortunately, is where Mr. Jaeger gets into hit or miss territory. Like most finance textbooks, explaining high technical concepts largely without any helpful graphs or charts is a tough deal. There is plenty of interesting information on how different strategies have fared return-wise over the years, but not a lot of visual explanation of the strategies. If I hadn’t had some prior knowledge of some of those concepts from school, I probably would have gotten a little lost. It also doesn’t help that he sometimes gives two or three different explanations for the same strategy. An instance of where Jaeger falls into needlessly complicating is his overview of event-driven investing. The classic strategy is relative simple: when two companies merge, you would want to short the equity of the acquirer while going long in the equity of the target company. He sort of buries this key bit of information in the middle of a long section of technical analysis.

One instance where he succeeds though, is in a chapter called “Modulation of Returns,” or informally, “winning often vs. winning big.” This is an excellent overview of the risk-return tradeoff, as well as momentum investing vs. contrarian investing and how they all tie together. He also does a good job on “short vol” versus “long vol” strategies and how to create them using the options markets. There is a solid conclusion chapter summing up everything pretty well, as well as a helpful glossary.

“All About Hedge Funds” isn’t perfect (what finance book is), but where one book falls short, another can surely make up the difference. Read up, monkeys!

Monkey’s Review 1: Barbarians At the Gate
Monkey’s Review 2: The Financier
Monkey’s Review 3: Decision Points
Monkey’s Review 4: Debunkery
Monkey’s Review 5: When Genius Failed
Monkey’s Review 6: Monkey Business
Monkey’s Review 7: Death Of The Banker
Monkey’s Review 8: A Journey
Monkey’s Review 9: Damn It Feels Good To Be A Banker
Monkey’s Review 10: The Quants
Monkey’s Review 11: All About Hedge Funds
Monkey’s Review 12: The Unlikely Disciple
Monkey’s Review 13: Adventure Capitalist
Monkey’s Review 14: The Hedge Fund Book
Monkey’s Review 15: Investing In Hedge Fund of Funds
Monkey’s Review 16: Hilarity Ensues
Monkey’s Review 17: The Prince
Monkey’s Review 18: Markets Never Forget (But People Do)
Monkey’s Review 19: The Money Culture