Several years ago, we used to speak of hedge funds as some mysterious instruments that were quite esoteric, states Nelken in the preface. “In the recent past, investors have relied on hedge funds to produce nice positive returns with low standard deviations.” Alas, this year’s returns don’t promise to be rosy.

One reason is the size of the US mortgage market, which is estimated to be nearly $10 trillion in outstanding loans. “Most of this debt has been securitised and is actively traded in over-the-counter markets as it is not listed on any exchange.” Mortgage loans, pooled or packaged, can serve as the collateral for CMOs (collateralised mortgage obligations), explains Sherak. “ABS covers a potpourri of products backed by a wide range of collateral.” Bonds in the ABS universe include ‘credit card receivables, auto leases, mobile homes, aircraft, boats, property leases, and franchise loans’.

An investor in hedge fund faces liquidity risk since capital is typically locked up for a year or two, explains a chapter on ‘liquidity haircut’. During the lockup period, a manager can vary his strategy, increase his risk exposure or worse, blow up, the book cautions. “The haircut can be used when making an allocation decision between a hedge fund and a traditional asset or fund.”

Of immense interest should be the chapter on ‘careers in hedge funds’ by Kathleen A. Graham. If you want to become a hedge fund trader, be armed with ‘a Masters degree in analytic finance, or financial mathematics,’ she advises.

Hedge funds are not a miracle cure, warns a concluding essay by Harry M. Kat. “Traditional performance evaluation methods like the Sharpe ratio and alpha can be extremely misleading.” Frantically chasing winners, as so many investors tend to do, can only lead to higher costs and consequently lower bottom-line returns, he counsels.

“A much more rational strategy is to develop proper due diligence and monitoring procedures, use these to identify professional, trustworthy managers (that charge reasonable fees) and simply stick with them.”

Timely read.

IR is no longer merely a means to meet the information requests of analysts and investors, writes M.S. Anand in ‘Investor Relations’ ( www.icfaipress.org ). “While a majority of companies are still at a nascent stage in developing an IR process, barely meeting the minimal disclosure standards, a few others have evolved strategies and are continually disseminating valuable information.” Investor-centric companies have an edge in getting better valuations, he adds.