Hedge Fund

Hedge Funds VS S & P 500

The Omega fund is ignored because it has only two-year track record.

Suggestion

•David should create the new fund of hedge funds. •The recommended composite should be optimized.

Recommended Composite VS S & P 500

45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

S & P 500 Composite

1987

1988

1989

1990

1991

1992

1993

Annualized Return Recommended Composite S & P 500 24.6% 13.5%

Standard Deviation 9.8% 16.0%

Porportion

Return/ Risk 2.51 0.84

The correlation between the recommended composite and S & P 500 is 0.49

Optimized Result 1

Result 1: Maximize the return, maintain the standard deviation of 9.8% Return/ Annualized Standard Proportion Risk Deviation Return Steinhardt 22.4% 13.9% 0% Tiger 27.5% 19.1% 42% Zweig 27.0% 10.9% 43% Regal 21.8% 12.6% 15% Knott 19.0% 9.5% 0% Optimized Composite 27.6% 9.8% 2.81 Original Composite 24.6% 9.8% 2.51 S & P 500 13.5% 16.0% 0.84

45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

S & P 500 Composite Optimized Composite

The correlation between the optimized composite and S & P 500 is 0.56

1987

1988

1989

1990

1991

1992

1993

Optimized Result 2

Result 2: Minimize the standard deviation, maintain the return of 24.6% Return/ Annualized Standard Proportion Risk Deviation Return Steinhardt 22.4% 13.9% 22% Tiger 27.5% 19.1% 28% Zweig 27.0% 10.9% 2% Regal 21.8% 12.6% 48% Knott 19.0% 9.5% 0% Optimized Composite 24.6% 4.2% 5.86 Recommended Composite 24.6% 9.8% 2.51 S & P 500 13.5% 16.0% 0.84

45.0%

The correlation between the optimized composite and S & P 500 is 0.37

40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

S & P 500 Composite Optimized Composite

1987

1988

1989

1990

1991

1992

1993

Suggestion for concerns

• Select different hedge funds to diversify risk. • Limit the proportion of fund of hedge funds in the whole common fund. • Assess the...