* Hedge Fund Leverage

HedgeCo.net reports: The Bank for International Settlements in Basel, Switzerland was probably abuzz last week watching history unfold before its eyes. After all, one of the lynchpins of the organization’s Basel II Accord was the requirement for banks to mark-to-market all assets - including less liquid ones. And it appears that doing so in a leveraged environment has put several banks into a death spiral in recent weeks.

But the BIS is also keeping an eye on hedge fund leverage. The organization just released a working paper called “Estimating Hedge Fund Leverage” that proposes a new method of calculating the level of leverage used by hedge funds and, it is hoped, a way to measure any resulting systemic risks to the financial system. Regular readers may remember that this topic was also covered by the Fed’s Tobias Adrian last year.

Detail: http://www.bis.org/publ/work260.pdf

* Performance, experience and size

The following paper is the first to use quantile regression to analyze the impact of experience and size of funds of hedge funds (FHFs) on performance. In comparison to OLS regression, quantile regression provides a more detailed picture of the influence of size and experience on FHF return behaviour.

Hence, it allows us to study the relevance of these factors for various return and risk levels instead of average return and risk, as is the case with OLS regression. Because FHF size and age (as a proxy for experience) are available in a panel setting, researchers can perform estimations in an unbalanced stacked panel framework.

This study analyzes time series and descriptive variables of 649 FHFs drawn from the Lipper TASS Hedge Fund database for the time period January 1996 to August 2007. Our empirical results suggest that experience and size have a negative effect on performance, with a positive curvature at the higher quantiles. At the lower quantiles, however, size has a positive effect with a negative curvature. Both factors show no significant effect at the median.

Detail: The Performance of Funds of Hedge Funds: Do Experience and Size Matter?

* Funds of funds

Since the after-fee returns in funds-of-funds are, on average, lower than hedge fund returns, it appears that funds-of-funds do not add value. However, researchers in Columbia Business School and BlackRock show that funds-of-funds should not be evaluated relative to hedge fund returns from reported databases.

Instead, the correct fund-of-funds benchmark is the return an investor would achieve from direct hedge fund investments on her own without recourse to funds-of-funds. They use certainty equivalent concepts and revealed preference arguments to estimate attributes of the true, implied true fund-of-funds benchmark distribution. Since the benchmark characteristics seem reasonable, they conclude that, on average, funds-of-funds deserve their fees-on-fees.

Detail: Do Funds-of-Funds Deserve Their Fees-on-Fees?