ST.

FRANCIS INSTITUTE OF MANAGEMENT

A STUDY ON HEDGE
FUND PERFORMANCE
WITH RESPECT TO
VARIOUS HEDGE FUND
STRATEGIES.
HEDGE FUND INDUSTRY ANALYSIS

KAVITA NAIK
MMS 1820-0055
 KAVITA NAIK - MMS 1820-0055

EXECUTIVE SUMMARY

The principal aim of this study is to provide the structure, organization, growth and risk-return
profile of global hedge fund industry. In particular, the objective of the study is to introduce the
evolution of the global hedge fund industry and some of the most common hedge fund investment
strategies used by the fund managers.

Investing in hedge funds is an extension of the use of specialized knowledge to obtain maximum
return-risk trade-offs. It represents an evolution in traditional investing rather than a revolution.
Investors who add specialized managers such as hedge funds can obtain returns in market
conditions and types of securities not generally available to traditional asset managers. This is
particularly true, given the number of hedge fund investment strategies that offer risk and return
opportunities that are not usually associated with traditional stock and bond investments.

The growth in assets from just over $300 billion in the late 1990s to $2.4 trillion by 2007
corresponded to a period of extensive research on hedge funds as an asset class, as well as the
relationship of individual styles to market factors and other non–market related performance
drivers.

The initial academic research on hedge fund performance mostly evaluated the positive portfolio
effects of adding hedge funds to institutional portfolios as well as the basic differences in liquidity,
risk, factor exposures, and return characteristics between the dynamic trading styles used by hedge
funds and traditional buy and hold strategies (Ackerman and McEnally 1999; Fung and Hsieh 1997).

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INDUSTRY OVERVIEW

Since the early 1990s, there has been a growing interest in the use of hedge funds amongst both
institutional and high net worth individuals. Due to their private nature, it is difficult to obtain
adequate information about the operations of individual hedge funds and reliable summary statistics
about the industry as a whole. Hedge funds are known to be growing in size and diversity. As at the
end of 1997, the MAR/Hedge database recorded more than 700 hedge fund managing assets of US$
90 billion. See Table 1. This is only a partial picture of the industry, as many funds are not listed with
MAR/Hedge. In practical terms, it is not easy to estimate the current size of the hedge fund industry
unless all funds are regulated or obligated to register their operations with a common authority.
Brooks and Kat (2001) estimated that, as at April 2001, there are around 6000 hedge funds with an
estimated US $400 billion in capital under management and US $1 trillion in total assets.

While hedge funds are well established in the US and Europe, they have only begun to grow
aggressively in Asia. In the week ending April 30, 2002 alone, 8 new funds were introduced or
launched. These were fund initiated by familiar names like Merrill Lynch, Lazard, Morley, Societe
Generale, HSBC and Crosby. In year 2000, there were some 30 funds that were established. They
attracted about US$ 600 million in capital. Another 20 hedge funds were set up in 2001. Many of
these were start-ups and founded by talents who were previously employed by large institutional
fund management companies. In 1999, Hedge Fund Intelligence launched a new publication,
AsiaHedge. Recently, AsiaHedge has also been set up 4 Asia-Pacific Hedge Fund Indices, covering
funds in four 3 geographic areas: Japan, Asia ex-Japan, Asia inclusive of Japan and Australia.
AsiaHedge currently has the reported data of about 150 hedge funds operating in Asia and Australia
and/or investing in the Asia-Pacific markets. These hedge funds, like their counterparts in the U.S.,
use long/short, global/macro, and event driven strategies. Three interesting features differentiate
hedge funds from other forms of managed funds. Most hedge funds are small and organized around
a few experienced investment professionals. In fact, more than half of U.S Hedge Funds manage
amounts of less than US$25 million. Further, most hedge funds are leveraged. It is estimated that 70
per cent of hedge funds use leverage and about 18% borrowed more than one dollar for every dollar
of capital1. Another peculiar feature is the short life span of hedge funds. Hedge funds have an
average life span of about 3.5 years.2 Very few have a track record of more than 10 years. These
features lead many to view hedge funds, as “risky” and “opportunistic”.

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INTRODUCTION TO COMPANY PROFILE WITH ORGANISATION CHART

Morgan Stanley Fund Services is a leading global Hedge Fund Administrator establishes in
2004 with headquarters in New York. Through its regional offices, subsidiaries and affiliates
Morgan Stanley Fund Services provides its products and services to a large and diverse group
of clients including hedge funds and asset management funds.
Morgan Stanley Fund Services is a wholly owned subsidiary of Morgan Stanley (the firm),
parent company. Morgan Stanley has obtained financial holding company status in US. Its
subsidiaries are subject to supervision and regulation of Federal Reserve Bank.
Morgan Stanley Fund Services is independent legal and business ventures of Morgan Stanley
with offices across six global location. In India it has operations for Analytics, Accounting,
Centralised Exceptional Reporting Team, Investor Services, Financial Reporting and Tax.
These teams are part of global integrated system of Morgan Stanley.
Morgan Stanley Fund Services as a Hedge Fund Administrator keeps records of a fund's
assets, calculate its net asset value per share, processes share applications and redemptions,
and provide shareholder services along with financial reporting.

Morgan Stanley

Institutional
Investment Banking Wealth Management
Securities Group

Sales & Trading

Institutional Equity
Division

Morgan Stanley
Fund Services

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DEPARTMENTAL INTRODUCTION WITH ORGANISATIONAL CHART

Investor Services is a department in Morgan Stanley Fund Services, which act as a first point
of contact for the Investors. Investors include High Net Individuals and Institutional Investors
who want to invest in Hedge Fund.
Investor Services looks into the day-to-day administration of the hedge fund. Dealing with
subscriptions/redemptions of shares in hedge fund. It looks into investor queries pertaining to
hedge fund and also maintain their contact details. It provides them with periodic statements
in prescribed format and in timely manner. And manages all the data related to investors for
the clients.
Along with that provide various compliance related checks pertaining to Money Laundering
and Tax evasion. Additional reporting related to the fund's annual accounts and all the
potentially data required by funds directors for review at board meetings. Also to attend
board meetings, and sending a representative fully briefed on all aspects of its
responsibilities.

Morgan Stanley Fund Services

Investor Services

Centralised Investor Service

Investor Service Operations
Operations

Client Facing DMT

Production AML

FATCA

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LITERATURE REVIEW

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NEED FOR STUDY

PROBLEM STATEMENT

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OBJECTIVE OF STUDY

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RESEARCH METHODOLOGY