Hedge Fund vs. Non-Hedge Fund Institutional Demand and the Book-to-Market Effect

Recent studies have documented that institutional investors trade contrary to the predictions of the book-to market anomaly. We examine whether a prominent sub-group of institutional investors, namely hedge funds, differ from other institutions in terms of their trading behavior with respect to the book-to-market effect. We find that hedge funds significantly alter their trading preferences with respect to growth and value stocks, after book-to-market values become public information. More importantly, we show that hedge funds are better able to identify overpriced growth stocks compared to other institutions. Our results contribute to the literature on institutional investors’ trading with respect to stock return anomalies

Essays on Hedge Funds Performance: Dynamic Risk Exposures, Anomalies, and Unreported Actions

The first chapter analyzes hedge fund activeness and its impact on hedge fund perfor- mance. We propose an innovative method to estimate time-varying risk exposures of hedge funds. The activeness is measured as the time-series average of sum of changes in risk exposures. We examine cross-section and time-series variation of activeness among hedge funds. The activeness can be explained by fund characteristics such as age, lockup period, performance fee, and past performance. Using four performance measures, we find little evidence of active funds outperforming others over the sample period 1994 through 2013. We find that activeness tend to yield better performance only in the pre-2002 period and such effect exists mainly for fund strategies that make directional bets. Chapter two studies how hedge funds’ activities in exploiting stock anomalies im- pact fund performance. Using a sample of 3024 equity-oriented hedge funds and 10 stock anomalies, we find that hedge funds overall trade on the correct side of the anomalies. The decile 10 portfolio of hedge funds that trade on stock anomalies most intensively out- perform the decile 1 portfolio of hedge funds by 2.16% of Fama-French (1993) alpha per annum and by 0.17 in appraisal ratio per annum. We find that crowdedness of hedge funds exploiting stock anomalies and competition among hedge funds weakens the effectiveness of exploiting stock anomalies in generating risk-adjusted performance. In the third chapter, we study the importance of unique stock holdings and unreported actions as the source of hedge fund performance. We calculate four holdings-based unique- ness measures. We find that these holdings-based uniqueness measures are not associated with fund alpha and appraisal ratio. The unreported actions, on the contrary, positively pre- dict hedge fund performance. We also find that hedge funds with greater level of unreported actions tend to exhibit less risk and greater return gap

Hedge Funds and Herding Behaviour

This chapter examines whether hedge funds herd, how this herding occurs, and any potential market wide effects. Bringing together the mainstream finance literature and that from a more management and sociological perspective, it is shown that hedge funds herd, although there is some evidence this is less than other large institutional investors. Mechanistically, such consensus trades occur because hedge firms communicate within tight knit clusters of trusted and smart managers, who share and analyze trading positions together. This industry structure is a function of the hyper decision-making environment faced by hedge fund managers, coupled with a desire for legitimization and to maintain reputation. Finally, note that hedge fund herding can have market wide effects either directly via network risk and indirectly, as follower institutional investors amplify hedge fund trading patterns

NEUROFINANCE: GETTING AN INSIGHT INTO THE TRADER'S MIND

Much of the academic finance theory is based on the assumption that individuals act rationally and behavioral finances treats investorsâ€(tm) choice based by behavioral biases. In contrast, neuro-finance (as a blending of psychology, neurology and finance) attempts to understand behavior by examining the physiological processes in the human brain when exposed to financial risk. Scientists map the mind to learn how fear and greed drive the financial markets. The paper, will briefly present why neurofinance is important and how will be able to provide in the near future a number of effective tools for improved financial decision making.Emotions, Behavioral Finance, Neurofinance, Brain, Risk taking, Affect, Beliefs, Dopamine, fMRI

Why do firms fail to engage diversity? A behavioral strategy perspective

The persistent failure of organizations to engage diversity—to employ a diverse workforce and fully realize its potential—is puzzling, as it creates labor-market inefficiencies and untapped opportunities. Addressing this puzzle from a behavioral strategy as arbitrage perspective, this paper argues that attractive opportunities tend to be protected by strong behavioral and social limits to arbitrage. I outline four limits—cognizing, searching, reconfiguring, and legitimizing (CSRL)—that deter firms from sensing, seizing, integrating, and justifying valuable diversity. The case of Moneyball is used to illustrate how these CSRL limits prevented mispriced human resources from being arbitraged away sooner, with implications for engaging cognitive diversity that go beyond sports. This perspective describes why behavioral failures as arbitrage opportunities can persist and prescribes strategists, as contrarian theorists, a framework for formulating relevant behavioral and social problems to solve in order to search for and exploit these untapped opportunities

Herd Behavior in Financial Markets

This paper provides an overview of the recent theoretical and empirical research on herd behavior in financial markets. It looks at what precisely is meant by herding, the causes of herd behavior, the success of existing studies in identifying the phenomenon, and the effect that herding has on financial markets. Copyright 2001, International Monetary Fund