Targeted by an activist hedge fund,do the lenders care?

Do banks worry about expropriation when an activist hedge fund targets their borrowers or are they reassured that their borrowers will perform better after such targeting? We study 1435 events during the 1996–2013 period in which an activist targeted a US corporation, to examine what happens to loan contract terms post-targeting. We present two new results. First, we show that when a firm is targeted by an activist hedge fund, the lenders of that firm charge a significantly higher rate on future loans and demand collateral more frequently than the loans made to risk- and industry-matched non-targeted firms. Second, we find that this increase in loan rate and the likelihood of collateral demand is limited only to those targets that experience a large positive announcement return when the news of an activist's involvement is first announced. We argue that higher interest rates and greater collateral requirements reflect the increased credit risk for these borrowers due, in part, to the possibility of wealth expropriation by the shareholders. Thus, we provide empirical evidence that an increase in equity value due to an activist's targeting may partially be due to wealth expropriation from creditors.     

Alpha or beta in the eye of the beholder: What drives hedge fund flows?

Capital Asset Pricing Model (CAPM) alpha explains hedge fund flows better than alphas from more sophisticated models. This suggests that investors pool together sophisticated model alpha with returns from exposures to traditional (except for the market) and exotic risks. We decompose performance into traditional and exotic risk components and find that while investors chase both components, they place greater relative emphasis on returns associated with exotic risk exposures that can only be obtained through hedge funds. However, we find little evidence of persistence in performance from traditional or exotic risks, which cautions against investors’ practice of seeking out risk exposures following periods of recent success.     

Asset management in an inflationary environment—Are commodities a useful hedge?

The 2008 German investment act now allows insurers to buy commodities. Taking the perspective of a German investor and using techniques of cointegration analysis this paper aims to investigate whether commodity investments can be a useful hedge against inflation. A financial asset can only be considered to be a hedge against inflation if its price is cointegrated with the general price level. The results of the study seem to imply that commodity investments may be considered as a hedge against inflation for German insurers, but only to a limited extend.     

Do investors show an attentional bias toward past performance? An eye-tracking experiment on visual attention to mutual fund disclosures in simplified fund prospectuses

This study examines the cognitive processes underlying investors’ extrapolations of past fund performance and whether investors’ attention patterns may explain their return-chasing behaviors. We measured the attention that investors paid to mutual fund disclosures in a simplified fund prospectus using unobtrusive infrared eye tracking. Results suggest that prior fund performance, which is normatively irrelevant information and not useful in predicting future performance, received considerable attention from investors. More interestingly, the impact of prior fund performance on investors’ purchasing intentions was fully mediated through expected returns and attention paid to past performance information. The results indicate that investors apparently believe in performance persistence or in a ‘hot hand’ effect, and that mutual fund purchases are driven by salient information such as superior performance. Moreover, we tested the disclaimer mandated by regulatory bodies, which warns that past performance does not guarantee future results. We found that the disclaimer was ineffective in reducing investors’ extrapolation biases, despite the fact that the disclaimer was attended to and properly encoded by investors.     

The sensitivity of beta to the time horizon when log prices follow an Ornstein–Uhlenbeck process

This paper provides a new theoretical approach to investigate the sensitivity of the familiar beta of the capital asset pricing model to the length of the return measurement interval; a phenomenon known as the intervalling effect. By setting the problem in a continuous time setting, and using exact results, we are able to generalize existing results in the literature. We derive an expression for beta as a function of the time horizon h, conditional on current time t. We show that beta is monotonic in h and derive conditions for it to be increasing or decreasing.     

Does beta react to market conditions? Estimates of ‘bull’ and ‘bear’ betas using a nonlinear market model with an endogenous threshold parameter

The authors use a logistic smooth transition market (LSTM) model to investigate whether ‘bull’ and ‘bear’ market betas for Australian industry portfolios returns differ. The LSTM model allows the data to determine a threshold parameter that differentiates between ‘bull’ and ‘bear’ states, and it also allows for smooth transition between these two states. Their results indicate that ‘bull’ and ‘bear’ betas are significantly different for most industries, and that up-market risk is not always lower than down-market risk. LSTM models indicate that the transition between ‘bull’ and ‘bear’ states is abrupt, supporting a dual-beta market modelling framework.