MUTUAL FUND PORTFOLIO CHOICE IN THE PRESENCE OF DYNAMIC FLOWS

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction‐of‐fund fees. The presence of dynamic flows induces “flow hedging” portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher‐fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.     

Hedge Fund Performance and Manager Skill

Using data on the monthly returns of hedge funds during the period January 1990 to August 1998, we estimate six‐factor Jensen alphas for individual hedge funds, employing eight different investment styles. We find that about 25% of the hedge funds earn positive excess returns and that the frequency and magnitude of funds' excess returns differ markedly with investment style. Using six‐factor alphas as a measure of performance, we also analyze performance persistence over 1‐year and 2‐year horizons and find evidence of significant persistence among both winners and losers. These findings, together with our finding that hedge funds that pay managers higher incentive fees also have higher excess returns, are consistent with the view that fund manager skill may be a partial explanation for the positive excess returns earned by hedge funds. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1003–1028, 2001     

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

Utilizing a large sample of actively managed equity funds and a recently developed EPU index for New Zealand, we show that fund flow performance sensitivity decreases with policy uncertainty. The role of policy uncertainty as a determinant of fund flow performance sensitivity is found to be stronger, particularly for funds with global focus, large sized funds, high momentum funds and those with high idiosyncratic volatility and low downside risk. The findings support the argument that high policy uncertainty dampens investors' ability to process information that allows them to distinguish fund manager skill from luck. The results remain strong after accounting for various macroeconomic factors.     

Interview: The future is bright,the future is hedge funds: An interview with James R. Hedges IV,founder, president,and chief investment officer of LJH Global Investments

Founded in 1992, LJH Global Investments is one of the oldest global hedge fund advisory and fund of hedge funds management firms. Its disciplined approach to evaluating hedge funds and their respective managers is recognized by many financial services firms such as banks, asset management firms, and insurance companies. They rely on the firm as a sub‐advisor to build, manage, and service fund of hedge funds products. Its founder, James R. Hedges IV, was the first fund of hedge funds expert ever invited to speak to the Bank of Japan executives on the burgeoning hedge fund industry. © 2004 Wiley Periodicals, Inc.     

Bond Fund Performance During Recessions and Expansions: Empirical Evidence from a Small Market

This paper provides the first investigation about bond mutual fund performance during recession and expansion periods separately. Based on multi‐factor performance evaluation models, results show that bond funds significantly underperform the market during both phases of the business cycle. Nevertheless, unlike equity funds, bond funds exhibit considerably higher alphas during good economic states than during market downturns. These results, however, seem entirely driven by the global financial crisis sub‐period. In contrast, during the recession associated to the Euro sovereign debt crisis, bond funds are able to accomplish neutral performance. This improved performance throughout the debt crisis seems to be related to more conservative investment strategies, which reflect an increase in managers' risk aversion.     

Corporate culture,ethical stimulus,and managerial momentum: Theory and evidence

Research on organizational culture and ethical decision making has shown that ethical trainings predict and interact with other institutional variables to establish an ethical culture, while other studies suggest that the exposition of moral symbols leads to an increase of individuals' moral awareness. This study examines whether the relation between managerial momentum and fund performance is contingent upon ethical stimuli, team composition and interactions between them. It thus bestows insights to better inform institutional investors (including those working with mutual funds, pension funds, and insurance) about the nature and impact of ethical stimuli, when coupled with managers' momentum and team size, on the prediction of overall return of managed funds. I develop a new measure of managers' momentum termed “managerial momentum” and test our proposed theory and hypotheses using large samples of U.S. and Canadian mutual funds. The evidence reveals that there is sizeable positive effect of both corporate culture with its ethical dimensions and ethical stimulus on the fund performance. Furthermore, there is subtle evidence that both factors divulge additional information about the fund performance, but their effects are conditional on higher managerial momentum or team size, suggesting that managerial momentum alone is not sufficient. However, it is necessary to have the institutional ethical climate and/or managers' continuous ethical training to achieve viable and resilient investment opportunities tailored to the needs of different clienteles.     

The Canadian Hedge Fund Industry: Performance and Market Timing

We analyze the risk and return characteristics of Canadian hedge funds based on a comprehensive database we compiled. We find that Canadian hedge funds have higher risk‐adjusted performance and different distributional characteristics relative to the global hedge fund indices. We investigate market timing by Canadian hedge funds and find that they do not time the Canadian or global stock and bond markets, but hedge funds in the Managed Futures strategy group time the commodity market. These results are robust to parameter instability and structural changes in the model. We also illustrate the impact of using local and global risk factors to analyze the performance of local investment firms.     

The Risk-Return Relationship of Pension Funds With Investments in Hedge Funds

This article investigates if investing in local hedge funds improves the risk-return relationship of Brazilian pension funds. Investment in hedge funds by pension funds is growing elsewhere, with an increasing utilization of a multiplicity of hedge funds specialized in specific strategies or niches. We analyzed the performance of a typical pension fund allocation in Brazil as well as alternate allocations that included hedge funds. We used robust estimates of the covariance matrix to mitigate the errors in variables that are problematic in the inputs of the optimization. The results show that hedge funds improve the risk-return relationship of the typical pension fund allocation, contribute to a higher accumulated return at the end of a one-year period, and reduce portfolio rebalancing. Investments in hedge funds ease reaching the typical 6% annual return target with less risk exposure.     

Emerging market hedge funds in the United States

This paper compares the performance and capital flow to emerging market hedge funds located in the US with those of the funds located in other countries. I find that the US funds on average provided neither a positive risk-adjusted return nor a liquidity premium to compensate for the stronger share restrictions they imposed than the other funds during 1994–2012. Quarterly flow to the US funds was 1.25 to 7.88 times higher but it was less sensitive to past performance. Smart money effect was observed among the Caribbean funds, Hong Kong funds and Singapore funds, but not among the US funds.     

证券投资基金管理费用的实证分析

采用多元线性回归方法,以2000-2003年我国已发行基金为研究对象,对年度基金管理费用与基金业绩、规模之间的关系进行了实证分析。结果表明:基金业绩、规模在2000年和2001年是影响基金管理费的主要因素;但自从2002年证监会全面停止提取业绩报酬之后,基金业绩对管理费用的影响不再显著,甚至出现了基金收益系数为负的怪现象。在此基础上,提出了对我国基金管理费用改革的几点建议。     

Government policy towards entrepreneurial finance: Innovation investment funds

This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982–2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government–private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.     

The performance of socially responsible equity mutual funds: Evidence from Sweden

This paper presents a comprehensive analysis of socially responsible (SR) funds in Sweden by assessing fund managers' abilities and performances across different market states. These issues are analyzed at the aggregate and individual fund levels. The paper also presents several new statistical tests that allow more precise inferences about differences in performance and the variability in fund returns arising from different benchmarks. In general, SR and conventional funds perform similarly to the market. At the aggregate level, SR funds investing in Sweden and Europe perform similarly to conventional funds, while those investing globally tend to underperform. This underperformance seems to be linked with poor selectivity abilities of global SR fund managers. For individual funds, the performance of both types of funds is more similar. Most funds perform similarly in crisis periods compared to non‐crisis periods. Overall, our results are consistent with a mature market for SR investing and support the view that the similar performance of SR and conventional funds is associated with the mainstreaming of SR investment in Sweden. These findings encourage SR investing both by socially conscious investors, who wish to align their social values with their investment decisions, as well as by conventional investors, who will not be penalized by investing in these funds. We also call attention to the difficulties investors face when trying to identify funds with high social standards, considering that there is scarce information on the extent to which each fund (SR or conventional) holds stocks that comply with ethical and social criteria.     

Gravitation Toward Prior Performance in Mutual Fund Advertisings: Do Consumer Investors' Processing Abilities Account for Biased Information Processing?

This study examines the cognitive processes involved in consumer investors' information processing of mutual fund characteristics. We tested whether consumer investors' limited processing abilities account for biased return perceptions, as reported in the literature. Consumer investors' processing abilities were manipulated by varying the duration of information exposure time to a mutual fund advertisement. Experimental results suggest that a longer time spent by consumer investors learning about mutual fund characteristics resulted in reduced reliance on prior fund performance as a heuristic cue, which in turn resulted in an unbiased processing of mutual fund characteristics. In contrast, when consumer investors spent less time learning about mutual fund characteristics, prior fund performance significantly affected subsequent return expectations and argument persuasiveness of the mutual fund advertisement. These findings suggest that disclaimers warning that past performance does not guarantee future results are ineffective when consumer investors have limited attention and lower processing abilities .     

THE INCENTIVES OF HEDGE FUND FEES AND HIGH‐WATER MARKS

Hedge fund managers receive a large fraction of their funds' profits, paid when funds exceed their high‐water marks. We study the incentives of such performance fees. A manager with long‐horizon, constant investment opportunities and relative risk aversion, chooses a constant Merton portfolio. However, the effective risk aversion shrinks toward one in proportion to performance fees. Risk shifting implications are ambiguous and depend on the manager's own risk aversion. Managers with equal investment opportunities but different performance fees and risk aversions may coexist in a competitive equilibrium. The resulting leverage increases with performance fees—a prediction that we confirm empirically.     

Private equity performance and capital flows: Evidence from China

For more than 1500 private equity funds in China over the period from 1992 to 2013, we construct fund level performance metrics with investment level return data and examine performance and capital flows. The median (mean) fund IRR, net of fees, is 9.0% (51.7%), based on a sample that controls for survivorship bias. Fund IRRs are neither related to fund own characteristics, such as fund size, nor to overall market conditions around the time when the fund is raised. Competition reduces fund performance: returns are lower when there are many competitors entering the industry at the same time. Although experienced partnerships are more likely to raise a follow-on fund and to raise more capital, fund performance is not related to general partnership (GP) investment experience. Further, there is no performance persistence across funds managed by the same GP. Lastly, there is some evidence of investor maturity when judged on GPs' historical performance. This evidence characterizes a burgeoning yet immature PE industry in China.     

Psychological Capital: Impacts on Asset Management

Drawing together the areas of behavioral finance and positive psychology, the present research sought to investigate whether the psychological capital of investment fund managers is associated with fund performance in a context of financial instability. The theoretical propositions were presented and evaluated empirically through primary data on investment fund manager profiles and secondary data on the cumulative stock fund returns. The results indicate that funds managed by managers with greater resilience and optimism obtained a higher return than the mean profitability in a period of market instability.     

The case against active pension funds: Evidence from the Turkish Private Pension System

Using data on private Turkish pension funds we show that most active managers are not able to provide performance beyond what could be achieved by passive indexing. The average fund beats its benchmark by only 26 basis points, before fees. We also observe herding behavior among managers' asset allocation decisions which can potentially explain their lack of overperformance. Our results strongly support the need for low-cost index funds in emerging market countries that are reforming their pension schemes. We further recommend regulatory oversight on the “activeness” of funds and introduction of default plans with more balanced asset allocations.     

Do hedge funds time market tail risk? Evidence from option-implied tail risk

This paper focuses on an unexplored dimension of fund managers’ timing ability: Market-wide tail risk implied by information in options markets. Constructing the option-implied tail risk, we investigate whether hedge fund managers can strategically time the tail risk through adjusting their exposure to changes of it. Using an extensive sample of equity-oriented hedge funds, we find strong evidence of tail risk timing ability of hedge fund managers. Furthermore, tail risk timing ability brings significant economic value to investors. Top-ranked funds outperform bottom-ranked funds by 5–7% annually after adjusting for risk factors. Our results are robust to various robustness checks.     

The Role of Corruption,Culture, and Law in Investment Fund Manager Fees

This article considers an international sample of venture capital and private equity funds to assess the role of law, corruption, and culture in setting fund manager fees. With better legal conditions, fixed fees are lower, carried interest fees are higher, clawbacks are less likely, and share distributions are more likely. Countries with lower levels of corruption have lower fixed fees and higher performance fees, and are less likely to have clawbacks and cash-only distributions. Hofstede’s measure of power distance is negatively related to fixed fees and the use of cash-only distributions, but positively related to performance fees and clawbacks. Overall, the data strongly indicate that corruption, culture, and legal settings are much more significant in determining fees than fund manager characteristics and/or market conditions.     

Can Hedge Funds Time the Market?

We answer the somewhat narrower question of whether hedge funds adjust their conditional market exposure in response to real‐time changes in macroeconomic conditions, and whether doing so improves their performance. We find that hedge funds differ substantially in their responsiveness to macroeconomic data. The most procyclical market timers outperform their less active and counter‐cyclical peers by over 4% annualized with a risk adjusted alpha of 5.5%.