Valter Lazzari

Factors obtained both from the principal component analysis and from option strategies may account for the performance due to the dynamic trading style of the hedge funds. While the former approach may offer a more flexible representation of the myriad of strategies pursued by the hedge fund managers, the latter is better interpretable in financial terms and more suitable for out of sample applications. The two methodologies are compared with regard to the explanatory power of the style analysis, the indication of the funds with the most dynamic trading strategies, the valuation of the managers' performance and the assessment of the portfolios' risk exposures. Both approaches offer useful, even though not always convergent, insights concerning the peculiarities of the hedge funds' dynamic trading. As such, they may serve as complementary, rather than alternative, tools to detect the risk- return profile of the alternative investment vehicles.

A comparative approach of law and economics shows hedge funds as collective investment vehicles designed to contain the exposure to regulatory and supervisory constraints and obligations on professional asset management services. Institutional differences among hedge funds around the world arise from the need to adopt different organizational and operational solutions to minimize the implications of regulation and supervision. The propensity of hedge funds to outsource most of their functions that are not related to portfolio management decisions follows from the need to contain the cost of transacting with market counterparties and investors in an opaque environment. The role and the function of the providers of these services depend on the nature of hedge fund whose activity is being supported.

The Italian hedge fund investment managers show very lean organizational structures having outsourced most of their administrative processes and even some of their portfolio management activities. In the Italian alternative investment industry foreign advisor are playing an important role providing assistance to Italian manager in screening investment opportunities around the world and providing access to the most successful pure hedge fund manager. For Italian hedge funds, the outsourcing of administrative functions does not serve to prevent agency risk in the interest of fund investors. It is just a cost efficient solution for managing the operational procedures required to comply with regulatory obligations and to keep record of the fund transactions in the market and investors position in the fund.

Most of the fund of funds in the Italian alternative investment market are managed to be low risk investment products. Investment managers undertake strong diversification policy holding a large number of assets in their fund portfolio; state low volatility targets, restrain from using leverage and are not fond of pure hedge fund manager with short track record. None makes use of equalisation techniques in calculating performance fee since their cost would easily exceeds their benefit. Compared to foreign funds, Italian funds of hedge funds are appealing in terms of the subscription and withdrawal conditions.