A Transparent View into Hedge Fund Portfolios

Abstract

Faced with the challenge of minimal disclosure, investors in hedge funds seek alternatives to increase transparency in order to better manage the risk and return profile of their portfolio. In this article, the author explores the possibility of extracting additional insight from investor risk reports relevant to each fund. The author follows a bottom-up approach by constructing a replicating portfolio from building blocks that are either listed instruments or synthetic positions. Findings indicate that even limited transparency can accurately capture the risk characteristics of each fund and to a certain extent, their return profile, revealing key metrics at granular levels. When viewing results at the portfolio level, consisting of just six funds, the level of accuracy becomes particularly high.

TOPICS: Real assets/alternative investments/private equity, portfolio construction, risk management, performance measurement