Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings

1The research was partially funded by BNPP Hedge Fund Centre at Singapore Management Centre. Copy made available with permission of the authors.</p

The impact of hedge fund indices on portfolio performance

The purpose of this paper is to assess the combination of investable hedge funds indices with a traditional portfolio of 60% stocks and 40% bonds. The S&P 500 Index, the Barclays US Aggregate Bond Index, and three investable hedge fund indices, the MEBI Maximum Sharpe Ratio L1 Index, the MEBI Zero Beta Strategy L1 Index, and the Eurekahedge ILS Advisers Index, were considered to conduct performance comparison, using time windows of two, five and ten years, from the 1st of January, 2006, to the 1st of February, 2016. Significant reduction of the beta of the overall portfolio is reached. The findings showed that the investable hedge fund indices under analysis can be used as an easy way to protect a portfolio during different market conditions, diversifying the risks of the traditional investment portfolios. The paper provides evidence of how investable hedge fund indices lead to an improvement in the performance results, when compared with the traditional global equity-bond portfolio alone.info:eu-repo/semantics/publishedVersio

Performance of hedge fund short trades in the Finnish stock market

I examine the profitability of hedge fund short trades in Finnish equities. I also study short selling strategies producing abnormally high risk-adjusted returns. I do this by combining Finnish financial supervisory authority’s (FIN-FSA) data about short positions that are over 0.5% of the underlying company’s market cap with the companies’ return and returns of the factor portfolios. The factor portfolios used are Fama and French 3 and Carhart momentum. I find that hedge funds’ short trades are able to significantly outperform the market by 7 to 13 percent annually. I also divide the funds by their strategy depending on the amount of view they want to take on an individual company. I find that the funds that generally do not implement stock picking strategies, such as systematic equity strategies do not produce significant positive alphas. However, large wealth management companies’ funds are able to produce high positive alphas, as are the funds that generally exploit stock picking strategies, such as dedicated short funds

The market liquidity timing skills of debt-oriented hedge funds

We investigate the liquidity timing skills of debt-oriented hedge funds following the 2008 credit crisis, which demonstrated the importance of understanding liquidity conditions to manage the market exposure of investments. We base the analysis on the estimated co-movements of fixed income and equity market liquidity. Our findings, which are statistically robust, show evidence of liquidity timing ability in the fixed income market for all debt-oriented hedge fund strategy categories. Joint market liquidity timing skill, however, is only found in some categories. Our findings suggest that debt-oriented hedge fund managers use a sophisticated set of timing strategies in their investment managements

Traditional and Alternative Risk: An Application to Hedge Fund Returns

We analyse the evolution of the hedge fund industry and try to assess whether this alternative investment class makes sense over the traditional one. We are concerned with the impact of the crisis. Common sense tells us that that during phases of market euphoria, possibly due to over-optimism, investors may be attracted by potentially high returns promised by the leveraged structures and the aggressive investment policies of this class of funds. When the downturns hit, managerial opacity heightened by lack of regulations, scarce liquidity and level of risks (supposedly) higher than market portfolio can trigger severe losses in investors' portfolios. Thereupon, we tested empirically whether bear markets have a stronger impact on performances of these funds when compared with traditional investment classes and, dealing in terms of relative performances and losses, our results do not always comply with the common wisdom. Instrumental to this we introduce a specific metric for assessing hedge fund performance, comprising both the relative the advantage and risk of the alternative investment over the traditional one

Why do Low R2 Hedge Funds have Low R2? An Empirical Study of the Performance and Risk of Low R2 Funds

In this study, I examine whether low R2 funds are exposed to higher equity systematic tail risk that is not accounted for in the existing multi-factor models used to evaluate hedge funds. With a parsimonious set of risk factors that includes systematic tail risk, I show that there is a significant increase (about 12%) in the R2 for funds in the lowest quintile of R2. In contrast, the increase in R2 for funds in the other quintiles of R2 is relatively modest (about 2%). Moreover, I show that the spreads between the future performance of low and high R2 funds narrows by about 9% after accounting for the systematic tail risk factor. I also show that 90% of the decrease in future performance spread is driven by accounting for tail risk in the low R2 funds. My results provide evidence that superior performance of low R2 funds may not be entirely attributable to higher managerial skill, and that systematic tail risk of such funds can partially explain why they perform well

Will Tenure Voting Give Corporate Managers Lifetime Tenure?

Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies, but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption of tenure voting systems, where investor voting rights increase with the length of time that they hold shares. In furtherance of this proposal, some Silicon Valley investors have requested that the SEC permit the creation of a new stock exchange where all of the companies will be required to use tenure voting systems. Is tenure voting a better choice than dual-class stock for both corporate management and shareholders? In this paper, we review the arguments for and against tenure voting that have been made in the literature. In order to shed light on these claims veracity, we generate the first data base that documents institutional investor portfolio turnover rates for stock. We use this data to inform our mathematical voting model of tenure voting to show how its adoption would affect control rights within the corporation. We make two main findings that shed light on this question. First, we show that when corporate management holds a large block of company stock prior to the implementation of tenure voting, and retains at least 20-30% of the total number of company shares on a long term basis, then tenure voting will insure that corporate managers maintain control of the company even in the face of an attempted change of control transaction by a highly motivated dissident shareholder. Our second important finding is that if corporate management chooses to sell off its large initial block of the company’s stock over time, so that inside ownership levels drop eventually down to a low percentage level with the majority of ownership held by institutional shareholders with different investment horizons, then the use of tenure voting systems does little to protect management control in a proxy contest for corporate control. We conclude that tenure voting does indeed represent an intermediate form of voting control from a managers’ perspective: it does not guarantee management control, as dual-class share structures do, but does give control to management who maintain large equity stakes in the firm. Institutional investors are likely to see it as an improvement over dual-class stock structures in terms of giving them corporate governance rights, although less advantageous to these shareholders’ rights than a one share, one vote voting system

How Skilled are Hedge Funds? Evidence from their Daily Trades

The research was partially funded by BNPP Hedge Fund Centre at Singapore Management Centre. Copy made available with permission of the authors.</p

Three Essays on Corporate Governance and Institutional Investors

This dissertation analyzes the role of institutional investors in corporate governance. The first essay studies the effect of potential proxy contests on corporate policies. I find that when the likelihood of a proxy contest increases, companies exhibit increases in leverage, dividends, and CEO turnover. In addition, companies decrease R&D, capital expenditures, stock repurchases, and executive compensation. Following these changes, there is an improvement in profitability. The second essay investigates the optimal contract with an informed money manager. Motivated by simple structure of portfolio managers' compensation and complex risk structure of returns, I show that it may be optimal for the principal to stay unaware about the true risk structure of returns. The third essay analyzes the biases related to self-reporting in the hedge funds databases by matching the quarterly equity holdings of a complete list of 13F-filing hedge fund companies to the union of five major commercial databases of self-reporting hedge funds between 1980 and 2008