The Performance of Hedge Funds: Risk, Return, and Incentives

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988–1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data-conditioning biases is explored. We find evidence that positive and negative survival-related biases offset each other.     

WEBS,SPDRs, and country funds: an analysis of international cointegration

Prior empirical studies analyzing linkages between international equity markets have suffered because suitable real-world financial instruments representing national equity markets were not available for trading. In March 1996, World Equity Benchmark Shares (WEBS) began trading on the American Stock Exchange. WEBS are open-end index funds that trade like closed-end index funds; they are designed to closely track the international indices developed by Morgan Stanley Capital International. This study utilizes WEBS along with Standard & Poor’s Depository Receipts (SPDRs) to avoid the previously encountered problems associated with nonsynchronous trading, fluctuating foreign exchange rates, non-liquidity, trading restrictions, and index replication. Results indicate that substantial pairwise cointegration exists among the 18 market indices as well as between individual closed-end country funds and their own-country WEBS. In addition, Granger causality tests indicate the existence of short-term causal relationships, suggesting market inefficiencies and the possibility of short-run arbitrage opportunities.     

Synthetic hedge funds

We provide evidence on the performance and the replication success of a broad sample of 72 synthetic hedge funds from January 2009 to December 2013. Thereby, we assign the term “synthetic hedge fund” to mutual funds and exchange-traded funds with hedge fund indices as their benchmarks. Replication success is measured through different perspectives from distributional characteristics to risk-adjusted performance. We find an overall significant underperformance of synthetic hedge funds compared to an appropriate benchmark index. Furthermore, mutual funds (associated with active portfolio management) can produce return characteristics closer to hedge fund benchmarks than exchange-traded funds (associated with passive management) can. From a single strategy perspective, we find a picture of heterogeneity. Regarding the market environment, we show larger return differences for unusual market conditions than for regular ones.     

Winners and losers: German equity mutual funds

We investigate the performance of winners and losers for German equity mutual funds (1990–2009), using empirical order statistics. When using gross returns and the Fama–French three-factor model, the number of statistically significant positive alpha funds is zero but increases markedly when market timing variables are added. However, when using a ‘total performance’ measure (which incorporates both alpha and the contribution of market timing), the number of statistically significant winner funds falls to zero. The latter is consistent with the bias in estimated alphas in the presence of market timing. We also find that many poorly performing funds are unskilled rather than unlucky.     

开放式基金的净值增长能力与证券市场收益的互动关系检验

随着证券投资基金规模的不断增大,基金已经成为我国证券市场上的重要机构投资者,其对证券市场的影响也日益深入。考察股票型开放式基金的净值增长能力及其与证券市场指数收益的互动关系,得出如下结论:(1)我国开放式基金的净值增长率高于市场收益;(2)在一个较长时期内,市场收益的变动是开放式基金净值增长率变动的格兰杰原因,但反过来并不成立;(3)开放式基金的净值增长能力和市场收益之间存在着一种长期的协整关系。     

私有信息优势还是投研分析能力?——绩优基金与绩劣基金信息挖掘行为比较分析

基于开放型股票投资基金的重仓股数据,本文分析绩优基金与绩劣基金的信息挖掘行为有何异同,以判断基金绩效是否来自于其信息分析能力。研究发现,绩优基金交易行为的信息挖掘特征更为显著,而绩劣基金则未表现出信息挖掘行为。而且,实证分析发现,绩优基金更高的信息挖掘水平并非取决于信息获取优势,二者网络中心度并无显著差异。但是,择时择股等能力的显著差异意味着绩优基金相对较高的信息挖掘水平来源于其更优的投研能力。此外,绩优基金的信息挖掘行为随着市场环境变化而调整。     

Gender,style diversity,and their effect on fund performance

This paper examines the performance of 358 European diversified equity mutual funds controlling for gender diversity. Fund performance is evaluated against funds’ designated market indices and representative style portfolios. Consistently with previous studies, proper statistical tests point to the absence of significant differences in performance and risk between female and male managed funds. However, perverse market timing manifests itself mainly in female managed funds and in the left tail of the returns distribution. Interestingly, at fund level there is evidence of significant overperformance that survives even after accounting for funds’ exposure to known risk factors. Employing a quantile regression approach reveals that fund performance is highly dependent on the selection of the specific quantile of the returns distribution; also, style consistency for male and female managers manifests itself across different quantiles. These results have important implications for fund management companies and for retail investors’ asset allocation strategies.     

Use of active peer benchmarks in assessing UK mutual fund performance and performance persistence

The majority of UK style-specific mutual funds either report a broad market index as their prospectus benchmark or give no benchmark at all – a practice that may be (a) strategic, or (b) cultural and attributable to the lack of UK style-specific indices (e.g. mid-cap-growth, small-cap-value). The choice of a broad market index as a benchmark can bias the inferences of a fund’s performance and performance persistence. This study is the first to provide an alternative to style-specific indices in the UK, and suggests the use style-specific peer group benchmarks, following [Hunter, D., E. Kandel, S. Kandel, and R. Wermers. 2014. “Mutual Fund Performance Evaluation with Active Peer Benchmarks.” Journal of Financial Economics 112 (1): 1–29]. Our sample comprises of 817 active UK long-only equity mutual funds allocated to nine Morningstar style categories (peer groups) during the period 1992–2016. We show that the funds with the most significant positive peer-group-adjusted alphas continue to perform well one year ahead, in terms of both parametric and non-parametric measures of persistence in performance. Moreover, persistence in performance is driven by both winner and loser funds. The results within each peer group are by and large consistent with these findings.     

Hedging index exchange traded funds

This paper presents an empirical comparison of the out of sample hedging performance from naïve and minimum variance hedge ratios for the four largest US index exchange traded funds (ETFs). Efficient hedging is important to offset long and short positions on market maker’s accounts, particularly imbalances in net creation or redemption demands around the time of dividend payments. Our evaluation of out of sample hedging performance includes aversion to negative skewness and excess kurtosis. The results should be of interest to hedge funds employing tax arbitrage or leveraged long–short equity strategies as well as to ETF market makers.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Portfolio concentration and fund manager performance

This research examines the relationships among portfolio concentration, fund manager skills, and fund performance in Taiwan's equity mutual fund industry, yielding several empirical findings as follows. First, after controlling for other factors, concentrated equity funds tend to have smaller net asset values, larger fund flows, higher turnover rates, and a younger age and prevail in smaller fund families. Second, concentrated fund managers buy and sell stocks more smartly based on economic trends or market factors than do diversified fund managers, i.e., they have better market‐timing abilities. Third, only partial evidence supports the premise that concentrated equity funds have better next‐quarter risk‐adjusted performances than do diversified ones, as these fund managers' skills positively correlate to risk‐adjusted fund performance. Fourth, fund managers who have better stock‐picking abilities and intensively invest in certain industries generally exhibit better Carhart's alpha in the next quarter than do other fund managers. Fifth, fund managers' stock‐picking abilities more closely relate to long‐term performance than do their market‐timing abilities. Lastly, positive performance persistence is much stronger than negative performance persistence, but concentrated funds do not have stronger performance persistence than do diversified funds.     

The timing ability and global performance of Tunisian mutual fund managers: A multivariate GARCH approach

It is well-established in the financial literature that the global performance of mutual fund managers is the result of two skills: selectivity and market timing. This paper examines whether the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approach improves our perception of the global performance of fund managers compared with the unconditional approach and the conditional approach based on instruments. We find strong evidence that the multivariate GARCH method makes mutual fund performance looks better relative to the existent approaches, but this improvement in the global performance does not mean necessarily that mutual funds outperform traditional benchmarks. Indeed, mixed mutual funds yield neutral performance relative to benchmarks, whereas bond mutual funds generate significant positive global coefficients. The strong performance of bond fund managers comes from their ability to pick profitable bonds, not from their ability to time the market. Also, the empirical tests highlight that the best (worst) bond funds in the past remain at the top (bottom) of the ranking in the following years. These findings suggest that the Tunisian bond market presents strong opportunities for sophisticated investors.     

Attribution of investment performance: an analysis of Australian pooled superannuation funds*

This paper evaluates the market timing and security selection capabilities of Australian pooled superannuation funds over the eight‐year period from January 1991 to December 1998. Evaluation of both components of investment performance is surprisingly scarce in the Australian literature despite active investment managers engaging in both market timing and security selection. The paper also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated. This paper employs performance benchmarks that account for the multi‐sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. Consistent with U.S. literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill.     

Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies

Compared with previous research, the present work extends existing literature by considering long-run relations among major international stock market indices, under different market conditions, and the implications of these relations on the implementation of statistical arbitrage strategies. The examined data contain two bust phases interrupted by a mild bullish period. Employing cointegration analysis, reported results initially indicate that changes in market performance affect the stability of long-run relations, therefore suggesting that arbitrageurs should perform rebalancing among the examined indices when a change in a market trend is evident. Furthermore, extreme market performance harms the mean-reverting properties of a potential long-run relation while moderate market performance points to cointegration between a pair of indices. However, the absence of a stationary spread does not suggest the potential of abnormal returns realization, in the short-run, through exploitation of deviations from its mean value. The applicability of our results may be of importance to market participants since the cointegration approach has recently received considerable attention by hedge funds adopting statistical arbitrage strategies.     

Investment manager characteristics, strategy, top management changes and fund performance

The present study examines the performance of Australian investment management organisations with direct reference to their specific characteristics and strategies employed. Using a unique information source, performance is evaluated for actively managed institutional balanced funds, Australian share funds and Australian bond funds. For balanced mandates, performance is evaluated with respect to the investment strategy adopted, the experience and qualifications held by investment professionals, and the tenure of the key investment professionals. The present study examines the performance of top management and the impact on returns when turnover arises. The research documents that a significant number of active Australian equity managers earned superior risk-adjusted returns in the period, however, active managers perform in line with market indices for balanced funds and Australian bond funds. A number of manager characteristics are also found to predict risk-adjusted returns, systematic risk and investment expenses for balanced funds.     

从2000年基金年报信息追溯基金研究中心的三个问题

本文从三个方面对2000年基金年报信息进行了剖析。第一，从多角度对33只证券投资基金进行分类的结果表明，最能体现基金业绩与投资风格差异度的分类方法不是基金的投资目标而是基金管理公司。基金管理公司内部的资源共享是造成这一现象的原因。第二，指数型基金在2000年的表现尚不尽人意，投资理念亦不清晰。第三，保险公司选择基金的标准相当理性，注重基金的分红市价比、夏普指数、资产净值收益率几项指标，其选择的正确性亦得到2000年基金业绩的证实。     

我国基金重仓股选股偏好的时期似无关回归分析

基于基金重仓股季度面板数据,本文采用时期似无关回归模型分析了四大类共28个指标对基金持股比例的影响,并利用基金重仓股的统计值特点发现基金筛选股票的标准。研究结果表明,基金确实在寻求价值型投资,扩大基金规模可减轻股市投机行为;基金在调研阶段和操盘阶段对风险有不同的偏好,调研阶段规避风险,操盘阶段偏好高风险高回报;基金偏爱长期流动性好的股票;开放式基金的选股要求高于封闭式基金,牛市时基金的选股要求高于熊市;基金偏爱关注率高、信息丰富的股票;基金对行业的偏好基于行业的业绩表现;基金重仓股持股比例基本上与指数有相似的变化趋势。     

Time and frequency connectedness of green equity indices: Uncovering a socially important link to Bitcoin

Green investment funds continue to interest as a sustainable non-conventional asset class. We examine their interconnectedness, using network and wavelet analyses, with both traditional and non-traditional financial assets. Results indicate that global stock market performance, along with the returns of emerging markets, commodity markets, and FinTech are strongly correlated with green indices. However, in comparison, Bitcoin is found to be isolated, as confirmed by wavelet analyses. When considering the evolution of green investment indices, their role as diversifiers to Bitcoin is especially interesting, suggesting many potential benefits for investors and policymakers. Perhaps the most prominent application of our results is for Bitcoin investors to consider more closely investing in green funds as an offset to concerns about the negative environmental consequences of investing in proof-of-work cryptocurrencies.     

Risk and return in convertible arbitrage: Evidence from the convertible bond market

In this paper, we identify and document the empirical characteristics of the key drivers of convertible arbitrage as a strategy and how they impact the performance of convertible arbitrage hedge funds. We show that the returns of a buy-and-hedge strategy involving taking a long position in convertible bonds (“CBs”) while hedging the equity risk alone explains a substantial amount of these funds' return dynamics. In addition, we highlight the importance of non-price variables such as extreme market-wide events and the supply of CBs on performance. Out-of-sample tests provide corroborative evidence on our model's predictions. At a more micro level, larger funds appear to be less dependent on directional exposure to CBs and more active in shorting stocks to hedge their exposure than smaller funds. They are also more vulnerable to supply shocks in the CB market. These findings are consistent with economies of scale that large funds enjoy in accessing the stock loan market. However, the friction involved in adjusting the stock of risk capital managed by a large fund can negatively impact performance when the supply of CBs declines. Taken together, our findings are consistent with convertible arbitrageurs collectively being rewarded for playing an intermediation role of funding CB issuers whilst distributing part of the equity risk of CBs to the equity market.     

A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?

We propose and test novel multifactor models of daily mutual fund performance. To this aim, we set up equity style indices and derive risk factors, which nest the established Fama and French (1992) and Carhart (1997) factors. We add two additional risk factors, namely idiosyncratic risk and Amihud (2002) liquidity. Our sample contains 528 actively managed mutual funds with European stock market focus during 2002 to 2009. Model estimation reveals that—while market excess return and size appear significant for the cross-section of all funds—the remainder factors explain the performance of subsets of funds. About one third of the funds exhibit significant factor sensitivities not only with respect to valuation or momentum, but also with respect to liquidity or idiosyncratic risk. No single risk factor is dominated and hence our six factor model may serve as a valid performance benchmark. In a four factor model setting, the Carhart model and a model with valuation replaced by liquidity perform best. Our results remain stable under various robustness checks. We further document that managers on average prefer liquid stocks, show no aggregate idiosyncratic risk preference and deliver results that are consistent with equilibrium models of fund performance.