An edited academic collection, not a trading manual: fourteen professors and practitioners each cover one slice of the hedge fund business. It is the best plain-English reference for what Sharpe, Sortino, Kelly, VAR, and leverage actually mean, but it hands you no system for finding trades.
The one idea
The book's real thesis, stated in chapter 1, is that alpha (return above what a pricing model like CAPM predicts) comes from only three sources: a superior information mosaic (piecing together public data faster or better than the market), superior information access (being first in the order flow, which the book admits shades into gray areas), or superior execution (closing the gap between paper returns and real fills, which the book calls the implementation shortfall). Everything else in the fourteen chapters is commentary hung on that frame.
Editor John Longo, a Rutgers finance professor, recruited practitioners to write the specialist chapters: a risk manager on VAR and position sizing, a due diligence analyst on background checks, a derivatives trader on options-based alpha. The result reads like a graduate course packet, not a strategy book. Each chapter ends with a bullet-point 'Tear Sheet' summary, which is the fastest way to strip-mine the book for its actual content.
Chapter 14 is the closest thing to a falsifiable claim in the book: it tracks three published academic anomalies (small-cap, momentum, accruals) rebuilt as hypothetical hedged funds from their publication year through 2005, and shows every one of them going through stretches that would have killed a real fund's business even while the multi-year average looked fine. The chapter's point is that alpha decays and is cyclical, not a discovery of new edge.
What it actually teaches
The book has no single trading method, so this is the sequence of risk controls chapter 12 walks a trader through before and after sizing a position.
TRACK P&L AND BATTING AVERAGE
Log daily profit and loss in dollars and percent. The book's worked example uses a $5 million account: a day up $56,941 (1.14%) next to a day down $104,808 (-2.07%). From that log, compute the batting average (days positive divided by total days). The book's target is 60% or better, though it says some strategies are viable down to 50%.
CHECK THE IMPACT RATIO BEFORE SIZING ANYTHING
Impact Ratio = average gain on winning days / absolute value of average loss on losing days. In the worked example the trader's average gain was $20,475 against an average loss of $35,331, an Impact Ratio of 0.58, meaning losses were run longer than wins, the opposite of the classic 'cut losses, let winners run' rule. A ratio under 1 is a warning sign regardless of batting average.
SIZE THE POSITION WITH THE KELLY FORMULA
KF = win probability minus (loss probability times average-winner-to-average-loser ratio). Worked example: 70% win rate, $1,500 average winner, $1,000 average loser. KF = 70% - 30%($1,500/$1,000) = 25% of capital on that trade. The book adds a firm-level cap of a maximum percent per trade on top of the raw Kelly number, since full Kelly sizing is aggressive.
CAP DRAWDOWN AND CUT EXPOSURE ON A BREACH
Maximum Drawdown = (minimum price - maximum price) / maximum price. The book's stated ceiling is 10% to 20%; past that, cut exposure rather than trying to trade back to even, because a 50% drawdown needs a 100% gain just to recover. It also flags that a losing streak can mean either normal profit-taking by the market or a genuinely broken strategy, and says the two are only distinguishable with a large enough sample.
MEASURE RISK-ADJUSTED RETURN WITH THE RIGHT RATIO
Sharpe Ratio (excess return over the risk-free rate, divided by standard deviation) is the default but penalizes upside volatility along with downside. The book's own example: a fund returning +20% then +10% scores worse on Sharpe than one returning 9% and 9.1%, even though most investors would take the first fund. Sortino Ratio swaps in downside deviation only, and the book's chapter 14 case study shows why it matters: a diversified multi-strategy blend scored a Sortino of 4.4 versus 1.3, 2.3, and 0.9 for its three individual components.
SIZE FOR LEVERAGE AND LIQUIDITY, NOT JUST DIRECTION
Gross Market Value (long exposure plus absolute short exposure) divided by capital gives the Leverage Ratio; the book's example is $200M long plus $200M short on $100M of capital, a 4-to-1 leverage ratio, even though the book is dollar-neutral. Separately, Days to Liquidate = shares held / (average daily volume x the percent of daily volume you're willing to trade). Example: 1 million shares, 750,000 average daily volume, willing to trade 20% of it a day, gives 1,000,000 / 150,000, or about 6.7 days to exit.
What it looks like Monday morning
A reader who trades size on their own account walks away with a checklist, not a strategy: compute your own Impact Ratio and batting average on your last month of trades before touching Kelly sizing, and if the ratio is under 1 the fix is smaller losers, not bigger winners. That is a genuinely useful audit and it costs nothing to run against a trade log already sitting in a spreadsheet.
Beyond that, there is nothing to build on Monday morning. The book names no entry signal, no screen, no setup. Its value is entirely in vocabulary and formulas that let a reader understand what a hedge fund manager or risk report is actually claiming, which is a different use case than finding a trade.
| Input | Value |
|---|---|
| Win probability (pW) | 70% |
| Loss probability (pL) | 30% |
| Average winner ($) | 1,500 |
| Average loser ($) | 1,000 |
| Kelly fraction: pW - pL(aW/aL) | 70% - 30%(1500/1000) = 25% |
| Expected value per trade | (1,500 x 70%) - (1,000 x 30%) = $750 |
The book directs traders to commit the resulting 25% of capital to the trade but does not caution against full Kelly sizing beyond noting that firms may impose their own maximum-percent-per-trade cap.
In aggregate, alpha is not possible... Nevertheless... there is persistence in hedge fund performance.John M. Longo, Hedge Fund Alpha
Where it fails
- There is no single method, because there is no single author. This is an edited volume with contributions from at least nine different writers across fourteen chapters, ranging from a Brazil-specific market overview to a sample due diligence background-check report. A reader hoping for one coherent, testable trading system will not find it; the book is closer to a reference binder than a strategy guide.
- Half the book is regional market description that dated fast. Four full chapters (3 through 6) walk through Brazil, Russia, India, and China market structure circa 2008: MICEX listing rules, FIIs registration requirements, capital controls. Regulatory regimes in all four markets have been substantially rewritten since 2009, and none of the numbers or restrictions cited can be relied on today without independent verification.
- The book's own case study shows the strategies it profiles don't survive contact with markets. Chapter 14's three anomaly-based hedged funds (size, momentum, accrual) each posted a double-digit loss year or worse that the book itself says would have killed a real fund's business: the momentum fund lost more than 14% in 1998 while the S&P 500 was up 28.6%, and the accrual fund lost 20.24% in 1998 and 21.92% in 2000. The chapter's conclusion is that alpha is cyclical and fragile, which undercuts the premise of a book titled Hedge Fund Alpha.
- It assumes an institutional reader, not an individual trader. The risk management chapter's worked examples run on accounts of $5 million and $100 million with prime brokers, dedicated risk managers, and Bloomberg-grade exposure software. The VAR, delta-beta adjustment, and gross/net exposure formulas are correct and clearly explained, but nothing in the book adapts them to a retail account size or retail data access.
- The 2008 crisis material is a snapshot, not an analysis, because the book went to press mid-crisis. Chapter 1 describes 2008 as 'shaping up to be the worst year ever for hedge funds, with most broad indexes down close to 20% at the end of October,' written before the year even finished. Madoff is mentioned as an 'alleged' Ponzi scheme. The book was written too close to the event to draw conclusions from it, and a reader today gets a first draft of history rather than the settled account.
- Superior information as a path to alpha is described, not endorsed, and reads uncomfortably close to front-running. Chapter 1's third source of alpha walks through a hypothetical where a Wall Street sales trader tips off favored hedge fund clients to an incoming institutional order before it executes. The author disclaims condoning insider trading, but the mechanism described is presented as a real, if murky, source of edge for the largest funds, not something a smaller trader can access or should aspire to.
Who it is for
Buy it if
You manage or analyze institutional money and want a single-volume refresher on the standard risk metrics (Sharpe, Sortino, VAR, Kelly, beta and delta adjustment) with real worked numbers attached to each formula. It also works as a due diligence primer if you are allocating to funds rather than running your own book.
Skip it if
You are looking for a trading system, a screen, or an entry and exit method. There isn't one here. Skip it too if you only trade a personal account: the position-sizing and exposure math assumes institutional infrastructure, and the regional market chapters are outdated enough to be unreliable.
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