Dynamic Analysis of Hedge Funds
Written by Casey Edward O'Meara   
As the trading strategies of alternative investment funds continue to grow in complexity, investors find themselves less and less able to gauge the risks inherent in such investments. With hedge funds intent on guarding proprietary methods and strategies, how can investors gain insight into how their money would be managed? How can they truly determine the risk that their money would be taking on?

This is just one of the many challenges Michael Markov meets on behalf of his clients.

On October 9th, Markov, the founder, CEO, and director of research of Markov Processes International, spoke to the Masters students in Math Finance about the growing inadequacy of traditional performance analysis with regard to alternative investments. Markov however is not discouraged.

In his presentation, Markov explained how one can take the little that is know about a particular hedge fund (mandates, past performance, etc.) and approximately reverse engineer the positions of the fund at any point in time over the fund’s history. The process, which requires a carefully chosen set of constraints and rigorous statistical methods, attempts to solve for these historical positions by replicating the fund’s returns using the fund’s universe of investable securities.

It is by no means trivial but the insight it produces can be of tremendous value. With a time series of a hedge fund’s positions in hand, Markov Processes International is able properly assess the strategies and aggressiveness of that particular fund and shed some light onto an area that has become increasingly dark for its clients.–CASEY O’MEARA '08