Reviewing the hedge funds literature I: Hedge funds and hedge funds' managerial characteristics

This paper summarizes the literature on hedge funds (HFs) developed over the last two decades, particularly that which relates to managerial characteristics (a companion piece covers the return and risk management characteristics of HFs). It classifies, the current HF literature, suggesting which critical problems have been “solved” and which problems have not been yet adequately addressed. It also discusses the effects of past financial regulation and the prospects for the effect of new financial regulation on the HF industry and its performance and risk management practices, and suggests new avenues for research. Furthermore, it highlights the importance of managerial characteristics for HF performance, and the successes and the shortfalls to date in developing more sophisticated HF-related risk management tools.     

Recent advances in hedge funds' performance attribution: Performance persistence and fundamental factors

We survey articles on hedge funds' performance persistence and fundamental factors from the mid-1990s to the present. For performance persistence, we present some pioneering studies that contradict previous findings that hedge funds' performance is a short term matter. We discuss recent innovative studies that examine the size, age, performance fees and other factors to give a 360° view of hedge funds' performance attribution. Small funds, younger funds and funds with high performance fees all outperform the opposite. Long lockup period funds tend to outperform short lockups and domiciled funds tend to outperform offshore funds. This is the first survey of recent innovative and challenging studies into hedge funds' performance attribution, and it should be particularly useful to investors trying to choose between hedge funds.     

Reviewing the hedge funds literature II: Hedge funds' returns and risk management characteristics

This paper summarizes the literature on hedge funds (HFs) developed over the last two decades, particularly that which relates to risk management characteristics (a companion piece investigates the managerial characteristics of HFs). It discusses the successes and the shortfalls to date in developing more sophisticated risk management frameworks and tools to measure and monitor HF risks, and the empirical evidence on the role of the HFs and their investment behaviour and risk management practices on the stability of the financial system. It also classifies the HF literature considering the most recent contributions and, particularly, the regulatory developments after the 2007 financial crisis.     

Quantile regression analysis of hedge fund strategies

Extending previous work on hedge fund pricing, this paper introduces the idea of modelling the conditional quantiles of hedge fund returns using a set of risk factors. Quantile regression analysis provides a way of understanding how the relationship between hedge fund returns and risk factors changes across the distribution of conditional returns. We propose a Bayesian approach to model comparison which provides posterior probabilities for different risk factor models that can be used for model averaging. The most relevant risk factors are identified for different quantiles and compared with those obtained for the conditional expectation model. We find differences in factor effects across quantiles of returns, which suggest that the standard conditional mean regression method may not be adequate for uncovering the risk-return characteristics of hedge funds. We explore potential economic impacts of our approach by analysing hedge fund single strategy return series and by constructing style portfolios.     

The risk in hedge fund strategies: Theory and evidence from long/short equity hedge funds

Theory suggests that long/short equity hedge funds' returns come from directional as well as spread bets on the stock market. Empirical analysis finds persistent net exposures to the spread between small vs large cap stocks in addition to the overall market. Together, these factors account for more than 80% of return variation. Additional factors are price momentum and market activity. Combining two major branches of hedge fund research, our model is the first that explicitly incorporates the effect of funding (stock loan) on alpha. Using a comprehensive dataset compiled from three major database sources, we find that among the three thousand plus hedge funds with similar style classification, less than 20% of long/short equity hedge funds delivered significant, persistent, stable positive non-factor related returns. Consistent with the predictions of the Berk and Green (2004) model we find alpha producing funds decays to “beta-only” over time. However, we do not find evidence of a negative effect of fund size on managers' ability to deliver alpha. Finally, we show that non-factor related returns, or alpha, are positively correlated to market activity and negatively correlated to aggregate short interest. In contrast, equity mutual funds and long-bias equity hedge funds have no significant, persistent, non-factor related return. Expressed differently, L/S equity hedge funds, as the name suggests, do benefit from shorting. Besides differences in risk taking behavior, this is a key feature distinguishing L/S funds from long-bias funds.     

Liquidity shocks,size and the relative performance of hedge fund strategies

We examine whether the increase in the flow of capital to hedge funds over the period 1994–2005 had a negative impact on performance. More specifically, we study the relative performance of small versus large funds for each of the hedge fund strategies. Our results indicate that on an absolute return basis, small funds outperform large funds. On a risk-adjusted return basis, however, we find that large funds outperform small funds, and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds. Further, funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks. We also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks.     

A Bayesian approach to detecting nonlinear risk exposures in hedge fund strategies

This paper proposes a model that allows for nonlinear risk exposures of hedge funds to various risk factors. We introduce a flexible threshold regression model and develop a Bayesian approach for model selection and estimation of the thresholds and their unknown number. In particular, we present a computationally flexible Markov chain Monte Carlo stochastic search algorithm which identifies relevant risk factors and/or threshold values. Our analysis of several hedge fund returns reveals that different strategies exhibit nonlinear relations to different risk factors, and that the proposed threshold regression model improves our ability to evaluate hedge fund performance.     

Timing the volatility risk of beta anomaly: Evidence from hedge fund strategies

Hedge funds are known to engage in the betting-against-beta (BAB) strategy arising from beta-anomaly-related market mispricing. This paper examines if equity-oriented hedge funds time the volatility risk when executing the BAB strategy. We apply realised and downside volatility risk measures to assess the BAB strategy. We show that for top volatility risk timers, older funds tend to be better risk timers, while among the bottom volatility risk timers, younger and larger-sized funds stand out as stronger timers of BAB volatility. We observe that the Long/Short Equity funds show evidence as the strongest volatility risk timers of BAB strategy when the market condition turned bad. This is supported by their other effective timing strategies at the same time, including timing the market sentiment. Our findings provide important references for private investors when selecting hedge funds as risk management is crucial to the success/failure of any investments.     

The risk in hedge fund strategies: theory and evidence from trend followers

Hedge fund strategies typically generate option-like returns.Linear-factor models using benchmark asset indices have difficultyexplaining them. Following the suggestions in Glosten and Jagannathan(1994), this article shows how to model hedge fund returns byfocusing on the popular 'trend-following' strategy. We use lookbackstraddles to model trend-following strategies, and show thatthey can explain trend-following funds' returns better thanstandard asset indices. Though standard straddles lead to similarempirical results, lookback straddles are theoretically closerto the concept of trend following. Our model should be usefulin the design of performance benchmarks for trend-followingfunds.     

Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks

This paper utilizes the inter-temporal relationship between the FTSE-100 stock index and its futures price level between 1992 and 1999 to examine the characteristics of several minimum variance hedge ratios and the performances of several alternative hedging strategies for dynamic portfolio management in the presence of cointegrated time-varying risks. Earlier studies neglected the importance of cointegration between the two variables which resulted in biased estimates. These studies, in general, also assume that the hedging period is the same as the estimation time interval. This paper also looks at several key issues when the holding period is longer than the estimation period, such as the construction of optimal minimum variance hedge ratios, and the trade-off between transaction costs and risk reduction.     

Mutual funds' exits,financial crisis and Darwin

It is recognized in the literature that there is a negative relationship between fund performance and fund exit. This paper analyses the performance of 6600 U.S. mutual funds that exited the market in the 2000–2014 period and nearly twice as many U.S. mutual funds that remained operational, to provide evidence on whether the negative exit – performance relationship existed during the 2008 financial crisis. We confirm the general relationship but show that, in contrast to all the other periods, there was no statistically significant exit – performance relationship during the financial crisis. We also show that the impact of expenses and loads on fund exit increased during the crisis. This is consistent with our argument that when some active investors leave the market, the passive ones become important to fund–families, albeit the investors may lose out as a result. We also show that the mergers that occurred in the years following the financial crisis resulted in statistically significantly worse post–merger performance of both the acquirers and of the targets in comparison with their pre–merger performance.     

Mutual funds' capital gains lock-in and earnings management

Capital gains taxation creates a lock-in effect, increasing investors' incentives to monitor and decreasing portfolio firms' incentives to cater to short-term investors. We show a negative relation between lock-in and portfolio firms' earnings management, and this relation is stronger for capital gains held by tax-sensitive investors. Further, the relation between lock-in and earnings management is stronger when the capital gains tax rate is higher. We show that locked-in funds vote against management and against audit committee members' reappointment following earnings management. Locked-in funds are less likely to exit a position following disappointing earnings announcements, reducing firms' incentive to manage earnings.     

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.     

Corporate control and shareholder activism in Germany: An empirical analysis of hedge fund strategies

Government-initiated reforms of the German financial system two decades ago shifted corporate control activities from universal banks to capital markets. Hedge funds took advantage of these changes by acquiring stakes in weakly governed firms. For 653 hedge fund interventions between 2000 and 2020, this study analyzes the changes in financial and operating performance and firm characteristics before and after the event. We also assess the probabilities that a firm becomes a target and that an attack creates shareholders value. On average, hedge funds increased returns, with the magnitude depending on the period, level of aggressiveness, institutional ownership, and industry. Crisis and non-crisis results differ, as hedge funds strategies are mostly successful in a rising stock market environment. Typically, hedge funds targeted smaller and more visible firms with higher sales growth, lower leverage, and higher institutional ownership. After the attack, firm profitability and cash holdings decreased, leverage increased, while investments in M&A and capex declined. This research offers new empirical evidence on the success of hedge fund strategies in Germany and on the performance of targeted firms.     

Public hedge funds

Hedge funds managed by listed firms significantly under-perform funds managed by unlisted firms. The under-performance is more severe for funds with low manager deltas, poor governance, and no manager co-investment, or those managed by firms whose prices are sensitive to earnings news. Notwithstanding the under-performance, listed asset management firms raise more capital, by growing existing funds and launching new funds post listing, and harvest greater fee revenues than do comparable unlisted firms. The results are consistent with the view that, for asset management firms, going public weakens the alignment between ownership, control, and investment capital, thereby engendering conflicts of interest.     

Trading off accuracy for speed: Hedge funds' decision-making under uncertainty

Active managers operating quick portfolio adjustments, backed only by some rough estimates and loose predictions, might improve their market timing performances to benefit in turbulent times, but oversimplification can lead to an inability to profit in calm markets. By selecting accuracy levels upfront, through different data-filtering techniques, we expose a trade-off between prediction accuracy and reaction speed across different hedge funds' investment styles. Our empirical analysis shows that less accurate predictions can speed up reactions to unexpected changes in a large set of uncertainty and risk measures. We justify and complement these findings with a simulation exercise.     

Emerging market hedge funds: Do they perform like regular hedge funds?

In this study, we investigate whether the performance of emerging market hedge funds (EMHFs) follow a pattern similar to that reported for advanced market hedge funds. In contrast to the pre-2007 period, our results for the post-2006 period show that EMHFs exhibit performance patterns similar to those reported for hedge funds that focus on the developed markets. Unlike in the pre-2007 period, EMHFs in general do not exhibit significant exposure to specific asset classes in the post-2006 period. On a risk-adjusted basis, we find that EMHFs do not consistently outperform the benchmarks. The reported performance patterns may provide useful insights to both academics and portfolio managers.     

Short-term hedge fund performance

Hedge fund returns are often explained using linear factor models such as Fung and Hsieh (2004). However, since most hedge funds live only for 3 years, these linear regressions are subject to over-parameterization. I improve the out-of-sample accuracy of the linear factor model by combining cross-sectional and time series information for groups of hedge funds with similar investment strategies. The additional cross-sectional information allows more accurate estimates of risk exposures. I also propose a trading strategy based on this methodology for extracting substantially larger risk-adjusted returns.     

The global minimum variance hedge

Review of Derivatives Research - We explore futures hedging based on the global minimum variance strategy. As evidenced by using eleven of the world’s major stock market indexes and their...     

解读套期保值会计准则

2006年2月15日,财政部印发了38项企业具体会计准则.相对于其他37项具体会计准则,第24号准则<套期保值>显得非常陌生.探究其原因,一方面是过去国内套期保值业务并不常见,另一方面则与会计实务界普遍缺乏金融知识有关,加之学术界中金融与会计的融合程度还不高,使得目前很难找到可供参考的、系统介绍套期保值会计理论的中文资料.