New Evidence On Hedge Fund Performance Measures

Hedge funds are still relatively unfamiliar to most investors despite the intense popularity they have enjoyed in recent years. Measuring the performance of these financial instruments using traditional methods is, however, problematic, since their returns do not follow a normal distribution. In this study, we consider rankings obtained with the Stochastic Dominance (SD) method and compare them with ranks produced using Sharpe Ratios, Modified Sharpe Ratios, and Data Envelopment Analysis. We also explore the advantages highlighted by the literature of the Data Envelopment Analysis (DEA) method in relation to traditional measures like Sharpe ratio and Modified Sharpe ratio. Our results show that classic performance measures are better correlated with SD than DEA results

The Impact Of Trading Volume On Portfolios Effective Time Formation/Holding Periods Based On Momentum Investment Strategies

This paper analyzes momentum investment strategies based on past market data to evaluate the impact of trading volume on price momentum for the Canadian Stock Market. Utilizing variant models of Jegadeesh and Titman (1993) and Lee and Swaminathan (2000), we evaluate the effective time formation/holding periods of portfolios using both past price and trading volume. The findings suggest that taking high trading volume into consideration in momentum investment strategies on the TSX between 1996 to 2004 generally outperformed a strictly price-based momentum strategy for both winners (t= 2.118, p< .05) and losers (t= 2.174, p< .05). The most effective time period for a winning-high-volume portfolio was nine months of formation, starting in April and a 3-month holding period. The holding period is shorter by six months compared to what is suggested by Assogbavi, et al. (2008). In addition, high-volume portfolios consistently bettered low-volume portfolios for both winners (t= 4.121, p< .001) and losers (t= 3.956, p< .001). For investors who base their portfolio construction on momentum investment strategies, these findings suggest that it would be wise to incorporate past trading volume in their selection process

Consumption, earnings risk, and payout ratios

This paper investigates the theoretical relationship between earnings, risks and dividends, in an intertemporal context. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we utilize the framework of the consumption capital asset pricing model (CCAPM) to examine the effect of systematic earnings risk on dividend policy. Our main result indicates that the dividend payout ratio of a firm is negatively related to its earnings consumption beta, obtained from the covariance between aggregate consumption and earnings. This result suggests that risk measured with earnings influences dividend policy. This result also suggests that the earnings consumption beta integrates the multiple dimensions of a firm’s earnings risk

Interfaces with Other Disciplines

Abstract In this paper we apply data envelopment analysis (DEA) to evaluate the performance of hedge fund classifications. The purpose of alternative investment strategies such as hedge funds is to offer absolute returns, so using passive benchmarks to measure their performance could be ineffective. With the increasing number of hedge funds available, institutional investors, pension funds, and high net worth individuals urgently need a trustworthy efficiency appraisal method. DEA can achieve this. An important benefit of the DEA measure is that benchmarks are not required, thereby alleviating the problem of using traditional benchmarks to examine non-normal distribution of hedge fund returns. We suggest that DEA be used as a complimentary technique (or method) for the selection of efficient hedge funds and funds of hedge funds for investors. Using DEA can shed light and further validate hedge fund manager selection with other methodologies

Consumption, Residual Income Valuation, and Long-run Risk

This paper develops a theoretical extension of the residual income valuation model that integrates the concept of long-run risk. The model starts with an intertemporal framework, assumes the clean surplus accounting relation, and expresses firm market value as the book value of equity plus the present value of expected future residual income. The main finding of the extension model indicates that a firm’s goodwill is negatively related to its accounting risk, measured by the long-run covariance of the firm’s abnormal earnings growth and aggregate consumption growth. In the context of the residual income valuation method, this finding suggests that the earnings-consumption covariance (in the long run) represents an appropriate accounting risk measurement of a firm’s intrinsic value

Earnings-consumption Betas and Stock Valuation

This paper integrates the long-run covariance between aggregate consumption and firm earnings into the stock valuation process. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we use the intertemporal framework of the consumption capital asset pricing model (CCAPM) to explore the effect of systematic earnings risks on intrinsic stock values. Our main results show that the equilibrium price of a stock is positively related to its long-run earnings growth rate, and negatively related to its earnings-consumption beta, obtained from its long-run covariance between earnings growth and aggregate consumption growth. This suggests that long-run risk measured with earnings affects the theoretical value of a firm. Overall, our work suggests that the long-run concept of risk, using accounting earnings, represents an appropriate parameter for estimating the equity value of a firm

Dividend Multifactor Process, Long-run Risk and Payout Ratios

The purpose of this paper is to examine the theoretical relationship between the multidimensionality of risk and dividend policy, in an intertemporal context. After assuming that dividends are generated by a multifactor process, we use the fundamental framework of the consumption capital asset pricing model to explore the effect of long-run risk on dividend payout ratios (dividends divided by earnings). Our approach is similar to any multifactor model that, given the N factor process, derives useful equilibrium conditions. Our main result shows that the dividend payout ratio is negatively related to N sensitive coefficients, given by the long-run covariance between dividends and economic factors. This suggests that the multidimensionality of long-run consumption risk influences dividend policy. In brief, the model proposes that the target payout ratio can be determined with a simple and easy-to-apply formula that takes into account the long-run sensitivity of dividends to various economic factors

Earnings multifactor process, residual income valuation, and long-run risk

In this paper, we extend the residual income valuation model by incorporating the long-run sensitivity of earnings to various economic factors. Our valuation procedure integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in finance and accounting). Our extension model begins with an earnings multifactor process, uses an intertemporal equilibrium version of the residual income valuation method, and sums over many periods. In this manner, we demonstrate that the abnormal earnings growth rate of a firm is linearly and positively related to N sensitivity coefficients, given by the long-run sensitivity between abnormal earnings and economic factors. We then reveal that the corresponding equity value of the firm is a function of the current book value, abnormal earnings, and N long-run risk parameters. In the context of the residual income valuation approach, these findings suggest that earnings sensitivity to several factors represents an additional technique to estimate risk (in the long run)