This is a graduate-course textbook on how hedge funds are built and run, not a book about how to trade. The real content is the math: leverage, margin, fee structures, and performance ratios worked out with actual numbers, buried in the end-of-chapter answer key.
The one idea
Stuart McCrary, a former hedge fund manager and finance professor, wrote this as a course book: fourteen short chapters covering what a hedge fund is, who invests in one, how it borrows money, how it gets paid, how it measures its own performance, and how it is taxed and regulated. There is no trading system in it. The book is explicit that it is filling a gap between breezy investor-facing paperbacks and the dense, unpublished technical material that law firms and accountants hand to professionals.
The genuinely useful part is quantitative: real formulas for leverage ratios and margin haircuts, real numbers for management and incentive fees, and worked calculations for the Sharpe ratio, Sortino ratio, standard deviation, downside deviation, and drawdown. Each chapter ends with a set of problems, and the book says outright that most of the quantitative material lives in those problems and their answers at the back, not in the main text.
The audience is someone who needs to speak the language of the hedge fund business: an MBA student, a new hire at a fund, or a lawyer or accountant who serves fund clients. Someone hoping this teaches them how to pick trades or run a strategy is reading the wrong book.
What it actually teaches
The book is not sequential. It is a reference organized around four recurring blocks of hedge fund mechanics, each with its own formulas and worked numbers.
LEVERAGE AND MARGIN MATH
Leverage is defined as total balance-sheet assets divided by capital (the fund-of-funds industry standard). Reg T sets initial margin at 50 percent on most exchange-listed common stock. Financing examples use the actual/360 convention: a $900,000 stock loan at 5 percent for 7 days costs $875. Haircuts run as low as a quarter of one percent on short-dated Treasuries and as high as 50 percent on volatile or illiquid stock loans. The book derives maintenance-margin and maximum-leverage formulas algebraically (equations 6.1 to 6.6) rather than just stating rules of thumb.
FEE STRUCTURE
Management fees run 1 to 2 percent of assets annually, charged monthly (a 1.5 percent annual fee becomes 0.125 percent a month). Incentive fees run 15 to 25 percent of profit, most commonly 20. A high-water mark means no incentive fee is charged again until the fund's net asset value clears its previous peak: the book's example has a fund rise from $1,000 to $1,500 NAV, drop to $1,400, and pay zero incentive fees until it retakes $1,500. A hurdle-rate example has a $100 million fund earning 3.5 percent against 3 percent LIBOR pay its 20 percent incentive fee only on the 0.25 percent spread, netting the manager $650,000 rather than a fee on the full return.
PERFORMANCE MEASUREMENT
Using one 12-month hypothetical return series throughout the chapter, the book walks the arithmetic average (1.85 percent a month) against the lower geometric average (1.73 percent a month, 20.73 percent annualized), then builds the standard deviation (5.11 percent monthly, 17.70 percent annualized via the square root of 12 rule) into a Sharpe ratio of 1.02522 and a Sortino ratio (using downside deviation instead of standard deviation) of 2.0495, both against a 4 percent risk-free rate. A separate high-water-mark table tracks drawdown month by month on the same data set.
LEVERAGE'S EFFECT ON RISK OF LOSS
Using the normal distribution and Excel's NORMDIST function, the book shows that doubling leverage on an unhedged position (1:1 to 2:1, 15 percent expected return and 18 percent standard deviation becoming 25 percent and 36 percent) only raises the probability of a loss from 20.2 percent to 24.4 percent, because expected return rises along with risk. A well-hedged, highly levered portfolio (two 90 percent-correlated positions, one long, one short) cuts standard deviation to 8.05 percent but still carries a 22.8 percent chance of loss, higher than the unlevered case. The lesson stated directly: more leverage does not simply mean more risk.
What it looks like Monday morning
A reader who works with hedge fund term sheets does the fee math before signing anything: run the incentive-fee calculation against the actual hurdle rate and look-back provision in the subscription documents, not the marketing summary, and check whether the high-water mark resets. Someone evaluating a fund's track record recalculates its Sharpe and Sortino ratios by hand using the book's formulas instead of trusting the number in the pitch deck, and checks whether the reported standard deviation is annualized correctly (monthly figure times the square root of 12, not times 12).
For a reader trying to size a levered position, the book's leverage-and-probability-of-loss framework is the actual takeaway: run the same NORMDIST comparison on your own expected return and standard deviation before assuming that adding leverage or a hedge changes your risk in the direction you assume it will.
| Portfolio | Leverage | Expected return | Std. deviation | Probability of loss |
|---|---|---|---|---|
| Unlevered, single asset | 1:1 | 15% | 18% | 20.2% |
| Levered, same asset (no diversification) | 2:1 | 25% | 36% | 24.4% |
| Levered, diversified (40% correlated 2nd asset) | 2:1 | 25% | 30.12% | 20.3% |
| Levered and hedged (90% correlated long/short) | 2:1 | 6% | 8.05% | 22.8% |
Doubling leverage on an unhedged position roughly doubled volatility but barely moved the chance of losing money at all; hedging cut volatility to under a quarter of the unlevered case yet produced the highest probability of a loss of the four scenarios.
One definition of a hedge fund is that it is a mutual fund that doesn't have to follow any rules.Stuart A. McCrary, The Hedge Fund Course
Where it fails
- There is no trading strategy in this book. Chapter 4, Hedge Fund Investment Techniques, surveys pairs trading, merger arbitrage, convertible arbitrage, and mortgage-backed strategies in a page or two apiece, with no entry rules, no position sizing, and no backtested performance. Anyone buying this expecting a method for generating returns will find only the plumbing around returns, never the returns themselves.
- The regulation chapter is a pre-financial-crisis artifact. Chapter 8 was written in 2005, before Dodd-Frank (2010), the Form PF reporting requirement for large fund advisers, the JOBS Act's 2013 change to general solicitation, and the SEC's 2023 private fund adviser rules. None of the current regulatory landscape for hedge funds is in this book, and the chapter reads as a snapshot of a regime that no longer fully applies.
- The LIBOR-based fee example no longer has a live benchmark to point to. The book's worked hurdle-rate example ties the incentive fee to LIBOR, which stopped being published in 2023 and was replaced by SOFR-based benchmarks. The math itself still works with any reference rate substituted in, but a reader checking a real term sheet today will not find LIBOR on it.
- The leverage and financing examples predate the 2008 crisis that reshaped them. The book notes that hedge funds in the past carried positions over 100 times capital before counterparties tightened up after Long-Term Capital Management's 1998 collapse, but it was written three years before the 2008 crisis triggered a much larger industry-wide deleveraging and before Basel III reshaped counterparty collateral requirements. The haircuts and financing rates quoted are a 2005 snapshot, not current market terms.
- Every worked number in the performance chapter comes from one invented data set. The arithmetic average, geometric average, standard deviation, Sharpe ratio, Sortino ratio, and drawdown table are all calculated from the same twelve fabricated monthly returns built for the chapter. A reader never sees these formulas applied to a real, audited hedge fund index, so there is no sense of what a Sharpe ratio above or below 1.0 actually looks like across real funds and real regimes.
- Skipping the end-of-chapter problems means skipping most of the math. The preface says directly that the question sections contain most of the book's quantitative material, and the answers are collected in a separate 50-page section at the back rather than worked inline. A reader who reads only the chapter prose, which is what the page count implies, gets a far shallower and less quantitative book than one who works every problem set.
Who it is for
Buy it if
You are studying for a role at or around a hedge fund (analyst, allocator, lawyer, accountant, or MBA student) and need the vocabulary and the actual formulas: leverage ratios, margin haircuts, fee structures, and Sharpe/Sortino math, in one reference. It also works as a refresher for anyone who needs to check a fund's fee calculation or performance claim by hand.
Skip it if
You want a book about how to trade or find an edge; this book has none and says so about itself. Skip it too if you need current regulatory or tax detail, since it predates Dodd-Frank, Form PF, and the end of LIBOR, or if you are not willing to work the end-of-chapter problems, since that is where most of the quantitative payoff sits.
As an Amazon Associate I earn from qualifying purchases. It costs you nothing extra, and it does not change what gets recommended or what the verdict says.