Carve Outs

CFA Level III Portfolio Management
#1

Hi,

By any chance, any one able to please summarize what exactly are carve-outs and what does it mean to allocate cash to them? Cant seem to make much out of what the Schweser notes say…

Thanks!

#2

I am also stuck in this. Waiting for clearification

#3

I’ve actually seen this done first hand inside a hedge fund.

It was about a $100 M hedgie I worked for during college. It was a fund that had various strategies like long-short and some private placements, etc. They began to suffer some “performance problems”, so the PMs took a sub-section of the results pursued by 1 strategy (private placements) and basically demonstrated it as its own fund. They carved out the results for 1 section of the book, created a new fund called the private-placement strategy fund and said, “wow look at this fund strategy. it has 3 years of results and it’s pretty awesome.” meanwhile the overall fund was languishing because they made several bad bets in the long/short side of the book.

a lot of asset houses over the years have cooked up results of funds by “incubating” funds… they will seed like 5 different start-up funds with $10 M, and then 1 of them will turn out to be a real winner and then other 4 are torpedoed. the marketing group will run with the 1 winner and say, 'wow look at these 3 years of awesome results for winner fund #1…"

the carveout is just trying to break up a larger fund by showing off a winning segment, while hiding the overall performance.

btw - obviously if you reduce the cash component of the winning fund, the overall performance is higher. so what they are saying is that it has to be managed on its own accord with some sort of cash component. you can’t just circle the winning investments from the “tech sector strategy” of “mega diverse mutual fund”, when it has not been a standalone strategy w/ its own cash balance, and present that performance.

  1. the performance would have been lower if it had a cash balance (drag down total returns)

  2. the “tech sector strat” fund was probably never consistuted as a standalone entity in the first place. the investment processes, risk mgmt, portfolio strategy was probably integrated into the “mega diverse fund”, because the cash balance and position allocation for the tech strat was managed as part of the larger fund – not on its own accord.

#4

Great insight , very grateful , prophets

#5

THANK YOU!

#6

probably won’t surprise you to hear that this hedge fund was

  1. later sued by its investors and the managing PM fled the country

  2. the only CFA charterholder at the firm was later fined by the SEC for trading on non-public info and is basically out of the business now because of it

  3. one of the backoffice employees (fund accounting) was found to have thousands of photos of sex acts with animals (beastiality) and was later fired

needless to say, i refused to work there after college. hedge funds are good times !

#7

LMAO GOOD TIMES

#8

Thanks mate… Very helpful indeed!

#9

What does allocating cash component mean?

If you have a balanced fund and you split the fixed income and equity, does the residual cash component need to be split proportionately as well?

#10

Yes, it’s no longer compliant after 2010/1/1.