Reading List

This is my reading list of papers, articles, newsletters and presentations on hedge fund strategies that are publicly available on the web.  The list is not organized in any particular way but will be updated often.

1. Hedge funds selling beta as alpha - Bridgewater Associates newsletter that discusses the emerging cognizance in the industry that most hedge funds are selling beta as alpha.  These funds systematically seeks exposure to “macro” factors rather than extraordinary insights into specific securities but are charging fees as if they are doing the latter.
2. Common risk premia - a presentation by Patrik Safvenblad explaining common risk premia and how they correspond to permanent but obvious effects which involve the bearing of risk and which therefore cannot be arbitraged away.  A strategy will work when there is demand for a benefit the granting of which by the (risk bearing) strategy provides it with a reward.  A risk that is priced by the market comes from many securities being affected by the same investor sentiment and therefore cannot be diversified.  In this sense, hedge funds taking the same type of risk are price-takers of that risk.  They are like contingent claims dependent on the same underlying source of risk and therefore receive the same price (Sharpe ratio) for it.  The market price of risk drives returns far more than any special skill or proprietary edge that a hedge fund may claim to have.
3. Significant correlations of "market neutral" strategies to the market - working paper by Andrew Patton reporting that about 30% of proclaimed "market neutral" hedge funds in the HFR and TASS databases have significant correlations to equity market indexes.  Although a figure of 30% may seem high, the proportion of "non-market neutral" equity oriented hedge funds found with significant correlation to the market is even higher - a whopping 87%!
4. The effect of return dispersion on statistical arbitrage strategies - a presentation by Michael Tan and Alex Greyserman providing credence to the prevailing wisdom that the dispersion of returns is on the decline due to the rising volume of program trading related to index products such as ETFs (exchange-traded funds).  The presentation shows an alarming downtrend since late 2002 in the absolute dispersion of large cap stocks, sounding a death knell for the type of statistical arbitrage known as "pairs trading".
5. Hedge funds are more similar to traditional stock portfolios than you think - Financial Times article that discusses journalistically how, contrary to popular perception, hedge funds may be drawing their returns mostly from the same source as traditional stock portfolios, viz. the risk of owning stocks.  Beyond the "smoke screen" of apparently sophisticated valuation models, fancy mathematical algorithms and risk management schemes, these hedge funds may be making money simply because everybody else is also making money.  They may be less of a diversification benefit to traditional stock and bond portfolios than generally believed.
6. Mean reversion - working paper by Exley et al containing a nice mthematical investigation of the concepts of mean reversion and mean aversion.
7. The too-far-too-fast idea - link to Chris Fuligni's website containing an enlightening discussion of how prices which have gone too far and too fast in one direction tend to come back.  Thus a good mean reversion strategy must have both price and time elements such that a large price change by itself does not necessarily qualify as a trading signal but one that occurred in a short enough time does.
8. Larry Hite quotable quotes - "I have noticed that everyone who ever told me that the markets are efficient is poor".  To this, Michael Tan chipped in the following:  If we merely collect risk premiums then we should believe in simple systematic trading methods.  Thinking in terms of risk premiums, i.e. those whose risk comes from the same investor sentiment affecting many securities and therefore cannot be diversified away, reinforces one's confidence in systematic trading methods.  For it is the commonplaceness of the effect that allows it to be captured with a systematic trading method.  And it is the same commonplaceness that breaks a complicated method when a simple one would do just fine - since the former would only be fitting noise in the data that is not part of the effect.  Simple systematic trading methods are both necessary and sufficient for the capture of common risk premiums.  The hedge fund business, after the inefficiencies have all been arbitraged away, will reduce to a search for risk premiums.
9. Extreme value theory - a self-contained monograph on estimating tail risks using extreme value theory by Gilli and Kellezi.
10. Alpha forecasting rule of thumb - an everything-you-wanted-to-know-about-alpha-but-were-afraid-to-ask article by Dan diBartolomeo.
11. Disposition Effect -
12. Universal Portfolios -

Only 10% through my paper collection... more to come.