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The growth of the use of hedge funds in both the USA and in Europe has led to greater attempts to regulate the market. The authors provide a guide to the way regulations are likely to be imposed and the differences which may occur in the USA and European markets as a result.

Hedge fund replication gained considerable attention during the period surrounding 2007 when it was anticipated to become for hedge fund investors what index funds are for equity investors. The hedge fund replication concept only lacked a track record. This paper aims to present an updated evaluation.

Performance is evaluated on both a raw‐return basis and a risk‐adjusted basis using Fung and Hsieh's 8‐factor model. Particular emphasis is given to analyzing the performance of these products during the financial crisis and to highlighting the specific characteristics that distinguished them from their hedge fund cousins during this period.

The results show that the hedge fund replication space is definitely proving its existence as a credible hedge fund investment alternative. Talented hedge fund managers will always be in high demand, but they may have to just prove their high compensation a bit harder.

Although this study is based on a short sample period, the results indicate that hedge fund replication products delivered returns that were at par with the returns of hedge funds. The replication products performed comparatively well during the crisis probably as a result of having less exposure to illiquid assets.

To the best of the authors' knowledge, this article uses the most extensive data set of 22 hedge fund replication products to analyze their performance.

To summarize Managed Funds Association's (MFA's) 2005 Sound Practices for Hedge Fund Managers™, which is designed to enhance the ability of hedge fund managers to manage operations, comply with applicable regulations, address unexpected market events, and help hedge funds satisfy responsibilities to investors.

Highlights the development of, and some of the recommendations set forth in, MFA's 2005 Sound Practices under the following categories: management and internal trading controls, responsibilities to investors, valuation policies and procedures, risk monitoring, regulatory controls, transactional practices, and business continuity and disaster recovery.

MFA's 2005 Sound Practices builds on recommendations first published in 2000, and subsequently revised by MFA in 2003, offering sound guidance on business and operational practices. In the 2005 update, MFA has expanded on topics of importance, including internal trading controls, responsibilities to investors, valuation, and risk controls, and has addressed new issues such as compliance programs, codes of ethics, and certain transactional practices. The 2005 Sound Practices is written from a “peer to peer” perspective and focuses on practices that are relevant primarily to the single‐manager hedge fund operation.

Article summarizes an essential hands‐on manual for hedge fund managers.

On September 29, 2003, the staff (“Staff”) of the Division of Investment Management of the U.S. Securities and Exchange Commission (the “SEC”) issued a report to the SEC entitled the “Implications of the Growth of Hedge Funds” (the “Report”). The Report recommends amending Rule 203(b)(3)‐1 of the Advisers Act to require a hedge fund manager to “look through” each existing client and count each of the hedge fund’s underlying beneficial owners as a “client” of the hedge fund manager for the purpose of determining whether an investment adviser has 15 or more clients and therefore must register under the U.S. Investment Advisers Act of 1940. Such a registration requirement effectively would increase the minimum investment requirement for a hedge fund. The Report does not necessarily support the argument that subjecting hedge funds to periodic examinations by the SEC will help in early detection of fraud and prevention of resulting investor losses. Despite the Staff’s intentions to identify distinctions between customary hedge fund vehicles and other types of investment funds, no clear hedge fund definition or standard was provided in the Report. As a result, there is a danger that the scope of new hedge fund regulations will be too broad

The growth in popularity of hedge funds has led UK regulators to put forward ways of protecting investors. Here the authors, from a noted law firm in the City of London, set out the ways in which hedge funds can be set up and how they work. They then examine the prospects for regulation and suggest how these should be taken into account by those running hedge funds.

The main purpose of this chapter is to estimate a model for hedge fund returns that will endogenously generate failure probabilities using panel data where sample attrition due to fund failures is a dominant feature. We use the Lipper (TASS) hedge fund database, which includes all live and defunct hedge funds over the period January 1994 through March 2009, to estimate failure probabilities for hedge funds. Our results show that hedge fund failure prediction can be substantially improved by accounting for selectivity bias caused by censoring in the sample. After controlling for failure risk, we find that capital flow, lockup period, redemption notice period, and fund age are significant factors in explaining hedge fund returns. We also show that for an average hedge fund, failure risk increases substantially with age. Surprisingly, a 5-year-old fund on average has only a 65% survival rate.

Purpose – This research pinpoints the limitations of conventional models for evaluating the performance of hedge funds and attempts to provide a new framework for modeling the dynamics of risk structures of hedge funds.

Methodology/approach – This chapter aims to explore how the systematic risk exposures of hedge funds vary over time and depend on exogenous variables that managers are supposed to use in their dynamic investment strategies. To achieve this, we used a Bayesian time-varying CAPM-based beta model within a state space technology.

Findings – The results showed that the volatility, term spread rate, and shocks in liquidity influence significantly on the time variation of hedge funds. Besides, the dynamics of beta indicates that the transmission channels of systematic risk are mainly the leverage levels of hedge funds and liquidity shocks.

Originality/value of chapter – These results are original because they help to explain how expected and unexpected hedge fund returns are correlated with the systematic risk factors via the beta dynamics.

Purpose – The purpose of this chapter is to present an investigation on the dynamic linkages between global macro hedge funds and traditional financial assets of developed and emerging markets.

Methodology/approach – To explore relationships among these price indices, we analyse Granger causality and vector autoregression (VAR) dynamics through impulse response functions. Besides, multivariate cointegration is used to know long-term relationships between assets and allows risk-averse investors to reduce uncertainty. Finally, a vector error correction model (VECM) provides active asset managers the opportunity to anticipate short-term price movements.

Findings – Our results show that in a Granger causality sense, we observe long- and short-term relationships between global macro hedge funds and traditional financial assets for Canada, France and Germany. This implies that opportunities for international portfolio diversification are significantly lower for countries having relationships between assets. For Canada, France and Germany, the risk-averse investors can reduce their long-term volatility by investing according to the cointegrating vector, whereas active managers can benefit from the knowledge of short-term asset price movements. The VEC Pairwise Granger causality in the short term confirms our analysis of causality according to VAR models.

Originality/value of paper – These results are original because they help the investor to understand the dynamics of the relationship between global macro hedge funds and traditional financial assets.

The purpose of this paper is to summarize two separate reports on best hedge fund industry practices issued on January 15, 2009 by the Asset Managers' Committee and the Investors' Committee of the President's Working Group on Capital Markets.

The paper provides a detailed summary of the two reports.

The Asset Managers' Committee Report sets forth a standard of best practices for the hedge fund industry aimed at reducing systemic risk and fostering investor protection. It recommends that hedge fund managers adopt comprehensive best practices in all aspects of their businesses, including the following five key areas: disclosure; valuation; risk management; trading and business operations; and compliance, conflicts and business practices. The Investors' Committee Report sets forth guidelines intended to “enhance market discipline, mitigate systemic risk, augment regulatory safeguards regarding investor protection, and complement regulatory efforts to enhance market integrity”. The Report provides recommendations to investors for evaluating hedge funds and overseeing hedge fund investments within a portfolio. It is divided into: a Fiduciary's Guide aimed at assisting plan trustees, banks, consultants and others with portfolio oversight responsibilities, in determining whether a hedge fund investment would be suitable for the organization they represent; and an Investor's Guide aimed at providing recommendations to investors who have decided to add hedge funds to their investment portfolio.

The paper provides a concise, informative guide by experienced securities lawyers with hedge fund expertise.