Share restrictions and asset pricing: Evidence from the hedge fund industry

This paper presents evidence on the relation between hedge fund returns and restrictions imposed by funds that limit the liquidity of fund investors. The excess returns of funds with lockup restrictions are approximately 4–7% per year higher than those of nonlockup funds. The average alpha of all funds is negative or insignificant after controlling for lockups and other share restrictions. Also, a negative relation is found between share restrictions and the liquidity of the fund's portfolio. This suggests that share restrictions allow funds to efficiently manage illiquid assets, and these benefits are captured by investors as a share illiquidity premium.     

How Informative Is Floating NAV When Securities Trade Infrequently?

We examine if a floating net asset value (NAV) increases the transparency of risk for investors. Using closed‐income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund's assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.     

The price of skill: Performance evaluation by households

Skilled investors make money off uninformed investors. By acting as intermediaries, they provide a hedge to the uninformed investors themselves. I present a model in which households have imperfect information about expected returns. Non-traded income shocks lead them to rebalance, sometimes at the wrong time. Active funds hedge this risk by trading on superior information. In equilibrium, they pay off when non-traded income disappoints, earning a premium that makes them appear to underperform index funds after fees. Empirical results using aggregate fund flows support the model. A corresponding asset pricing test can account for the apparent underperformance of active funds.     

Higher risk,lower returns: What hedge fund investors really earn

The returns of hedge fund investors depend not only on the returns of the funds they hold but also on the timing and magnitude of their capital flows in and out of these funds. We use dollar-weighted returns (a form of Internal Rate of Return (IRR)) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the Standard & Poor's (S&P) 500 index, and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.     

Exploring uncharted territories of the hedge fund Industry: Empirical characteristics of mega hedge fund firms

This paper investigates mega hedge fund management companies that collectively manage over 50% of the industry's assets, incorporating previously unavailable data from those that do not report to commercial databases. We find similarities among mega firms that report performance to commercial databases compared with those that do not. We show that the largest divergences between the performance of reporting and nonreporting mega firms can be traced to differential exposure to credit markets. Thus, the performance of hard-to-observe mega firms can be inferred from observable data. This conclusion is robust to delisting bias and the presence of serially correlated returns.     

Do hedge funds deliver alpha? A Bayesian and bootstrap analysis

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Sorting on Bayesian alphas, relative to OLS alphas, yields a 5.5% per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust and relevant to investors as they are neither confined to small funds, nor driven by incubation bias, backfill bias, or serial correlation.     

News and the cross-section of expected corporate bond returns

We study the cross-section of expected corporate bond returns using an inter-temporal CAPM (ICAPM) with three-factors: innovations in future excess bond returns, future real interest rates and future expected inflation. Our test assets are a broad range of corporate bond market index portfolios. We find that two factors – innovations about future inflation and innovations about future real interest rates – explain the cross-section of expected corporate bond returns in our sample. Our model provides an alternative to the ad hoc risk factor models used, for example, in evaluating the performance of bond mutual funds.