Hedge Funds (FRM Part 2 2025 – Book 5 – Chapter 9)
Learn hedge funds for FRM Part 2 (Book 5 – Risk Management & Investment Management). Professor James Forjan, PhD, explains characteristics of hedge funds, database biases, industry evolution, alpha vs beta, and core strategies: global macro, managed futures, distressed debt, market timing, market-neutral/long-short equity, fixed-income & convertible arbitrage. Includes institutional trends, fees (2/20), convergence in crises, and governance.
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After completing this reading, you should be able to:
Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds.
Explain biases that are commonly found in databases of hedge funds.
Explain the evolution of the hedge fund industry and describe landmark events that precipitated major changes in the development of the industry.
Evaluate the role of investors in shaping the hedge fund industry.
Explain the relationship between risk and alpha in hedge funds.
Compare and contrast the different hedge fund strategies, describe their return characteristics, and describe the inherent risks of each strategy.
Describe the historical portfolio construction and performance trend of hedge funds compared to equity indices.
Describe market events that resulted in a convergence of risk factors for different hedge fund strategies, and explain the impact of such a convergence on portfolio diversification strategies.
Describe the problem of risk sharing asymmetry between principals and agents in the hedge fund industry.
Explain the impact of institutional investors on the hedge fund industry and assess reasons for the growing concentration of assets under management (AUM) in the industry.
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