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Articles 1 - 30 of 35
Full-Text Articles in Business
Hedge Fund Managers Who Eschew Asset Gathering, Melvyn Teo
Hedge Fund Managers Who Eschew Asset Gathering, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Fund managers may eschew financial rewards for the non-pecuniary benefits from investment management. They may be highly focused on leaving a legacy of stellar returns when they retire and prefer to preserve their ability to generate those returns by staying small. Others may prefer to run small firms so as to devote more of their time and energy into investment activities as opposed to managing people. We empirically zero in on such managers by focusing on funds that have delivered superior returns but do not take advantage of their stellar performance track records to grow capital aggressively. We find that …
Can Hedge Funds Time Liquidity?, Charles Cao, Yong Chen, Bing Liang, Andrew W. Lo
Can Hedge Funds Time Liquidity?, Charles Cao, Yong Chen, Bing Liang, Andrew W. Lo
Research Collection BNP Paribas Hedge Fund Centre
We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, …
The Performance Of Listed Hedge Fund Firms, Lin Sun, Melvyn Teo
The Performance Of Listed Hedge Fund Firms, Lin Sun, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We examine the impact of fund management company listing on hedge fund performance. We find that hedge funds managed by listed firms underperform those managed by unlisted firms by 1.89 per annum after adjusting for risk. Using an event study framework, we show that hedge fund performance deteriorates from 10.32 percent per year in the 36-month pre-listing window to 2.16 percent per year in the 36-month post-listing window. Over the same period, firm assets under management effectively double from US$1.54bn to US$3.04bn. There is no evidence to suggest that funds managed by listed firms are better able to manage operational …
Inferring Reporting-Related Biases In Hedge Fund Databases From Hedge Fund Equity Holdings, Vikas Agarwal, Vyacheslav Fos, Wei Jiang
Inferring Reporting-Related Biases In Hedge Fund Databases From Hedge Fund Equity Holdings, Vikas Agarwal, Vyacheslav Fos, Wei Jiang
Research Collection BNP Paribas Hedge Fund Centre
This paper formally analyzes the biases related to self-reporting in hedge fund 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. We find that funds initiate self-reporting after positive abnormal returns that do not persist into the reporting period. Termination of self-reporting is followed by both return deterioration and outflows from the funds. The propensity to self-report is consistent with the trade-offs between the benefits (e.g., access to prospective investors) and costs (e.g., partial loss of trading …
Diversification In Hedge Fund Portfolios, Melvyn Teo
Diversification In Hedge Fund Portfolios, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We explore the diversification benefits of increasing the number of hedge funds in an investment portfolio. Conventional wisdom suggests that investors should construct a portfolio of 20 to 30 hedge funds in order to achieve a reasonably low portfolio variance. We show using Monte Carlo simulations that the marginal benefit of including an additional hedge fund in a fund portfolio diminishes significantly once the number of hedge funds increases beyond ten. Specifically, the annualized standard deviation of a fund portfolio diminishes from 16.55 percent to 7.40 percent as we increase the number of funds from one to ten. However, the …
Momentum Strategies In Futures Markets And Trend Following Funds, Akindynos-Nikolaos Baltas, Robert Kosowski
Momentum Strategies In Futures Markets And Trend Following Funds, Akindynos-Nikolaos Baltas, Robert Kosowski
Research Collection BNP Paribas Hedge Fund Centre
In this paper, we rigorously establish a relationship between time-series momentum strategies in futures markets and commodity trading advisors (CTAs) and examine the question of capacity constraints in trend-following investing. First, we construct a very comprehensive set of time-series momentum benchmark portfolios. Second, we provide evidence that CTAs follow time-series momentum strategies, by showing that such benchmark strategies have high explanatory power in the time-series of CTA index returns. Third, we do not find evidence of statistically significant capacity constraints based on two different methodologies and several robustness tests. Our results have important implications for hedge fund studies and investors.
Diseconomies Of Scale In The Hedge Fund Industry, Melvyn Teo
Diseconomies Of Scale In The Hedge Fund Industry, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
How does fund size impact fund performance in the hedge fund industry? We find unsurprisingly that fund size crimps both raw and risk-adjusted fund returns for the average hedge fund. An increase in fund assets under management from US$20m to US$1bn decreases fund alpha by 2.04 percent per year. However, significant variation exists across funds when funds are grouped by investment strategy and region. Equity long/short, event driven, and macro funds are susceptible to capacity constraints while fixed income and managed futures funds are largely immune to such concerns. Our finding that capacity issues impact macro fund performance raises fresh …
How Skilled Are Hedge Funds? Evidence From Their Daily Trades, Russell Jame
How Skilled Are Hedge Funds? Evidence From Their Daily Trades, Russell Jame
Research Collection BNP Paribas Hedge Fund Centre
We examine the trading skill of hedge funds using transaction-level data. After accounting for trading commissions, we find no evidence that the trades of the average hedge fund outperform across holding periods ranging from one month to one year. However, bootstrap simulations indicate that the trading skill of the top 10% of hedge funds cannot be explained by luck. Similarly, we find that the performance of top hedge funds persists and much of this persistence stems from intra-quarter trading skill. Skilled hedge funds tend to be short-term contrarians and their profits are largely concentrated in smaller, more illiquid stocks. Our …
Asian Hedge Funds In A Risk-On, Risk-Off World, Melvyn Teo
Asian Hedge Funds In A Risk-On, Risk-Off World, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We analyze the performance of Asia-focused and Asia-based funds in risk-on and risk-off periods between 2002 and 2011. We find that Asian hedge funds, like their US and European counterparts, deliver equity-like payoffs with bond-like risk. They generate returns that are roughly in line with the equity markets in risk-on and neutral states of the world. While their returns do not dominate those of US Treasuries in risk-off situations, they generally outperform the equity market by a significant margin. Indeed, their risk-adjusted returns in riskoff states are on par if not higher than their risk-adjusted returns in risk-on states. Of …
Asian Hedge Fund Report, Melvyn Teo
Asian Hedge Fund Report, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We survey the Asian hedge fund landscape and shed light on the size, investment region, strategy, and performance metrics of funds operating in Asia. Our findings indicate that hedge funds in the region typically maintain close physical proximity to their investment markets. Institutional quality hedge funds with assets under management greater than US$100m tend to focus on Greater China and Japan. Relative to Hong Kong, Japan, and Australia, Singapore harbors the most diverse group of hedge funds in terms of investment strategy. Between January 2000 and December 2011, Greater China focused funds have on average outperformed hedge funds investing in …
Hedge Fund Return Correlation Under Extreme Market Condition, Melvyn Teo
Hedge Fund Return Correlation Under Extreme Market Condition, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
How dependent are returns across hedge fund investment strategies? We estimate the probability that each investment strategy performs poorly when other investment strategies are delivering extreme negative returns. Under extreme market conditions, we find that event driven, distressed debt, and equity long/short funds exhibit the highest correlation with other styles while commodity trading advisors, macro, and equity market neutral funds exhibit the lowest correlation. In addition, we show that Asia-focused event driven and equity market neutral funds provide diversification for investors holding US- and Europe-focused funds.
Asset Gathering By Hedge Fund Firms, Melvyn Teo
Asset Gathering By Hedge Fund Firms, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We explore agency issues within hedge fund firms. We find that firms that launch many funds tend to underperform other firms by between 3 to 5 percent per year after adjusting for risk. These findings are strongest for firms offering funds that pursue many distinct strategies, invest in a variety of geographical regions, locate in a gamut of countries, and offer different base currencies. Our results allow fund investors to distinguish, ex-ante, firms that focus on delivering alpha from those that focus on gathering assets.
Flagship Funds At Hedge Fund Families, Melvyn Teo
Flagship Funds At Hedge Fund Families, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Motivated by the stellar performance of flagship funds such as the Renaissance Medallion fund, we ask whether hedge fund firms (e.g. Renaissance Technologies) have incentives to protect the performance of their flagship funds (e.g. Medallion). We find that the flagship fund tends to outperform other funds within the fund family. The fees and redemption terms of non-flagship funds at launch is correlated with the past performance of the flagship fund. Finally, flagship fund performance has a positive impact on net flows into the other funds within the same family.
The Risk Exposures Of Asia-Focused Hedge Funds, Melvyn Teo
The Risk Exposures Of Asia-Focused Hedge Funds, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
How have Asia-focused hedge funds adjusted their risk exposures in response to the recent financial crisis? By evaluating fund performance relative to an augmented Fung and Hsieh (2004) model, we find that Asia-focused hedge funds have broadly trimmed risk exposures post-crisis. They have reduced their exposure to small stocks relative to large stocks, scaled back their loadings on high yield corporate bonds relative to low yield U.S. sovereign debt, and pared their allocation to the Japanese equity markets. At the same time, however, they are now more exposed to Asian equity markets.
Quantitative Hedge Fund Selection (Part 2), Melvyn Teo
Quantitative Hedge Fund Selection (Part 2), Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Do fund incentives, volatility exposure, and liquidity risk affect fund performance? We show that hedge funds with high performance fees and high water mark provisions tend to outperform those with low performance fees and no high water marks. Moreover, funds that short volatility and embrace liquidity risk deliver significantly higher returns relative to funds that long volatility and eschew liquidity risk. Investors with access to secure capital and managed account platforms may be positioned to take advantage of these performance differences.
The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo
The Liquidity Risk Of Liquid Hedge Funds, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79 percent per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the TED spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping with an agency explanation, funds with strong incentives to raise capital, low manager option deltas, and no manager capital co-invested are …
Hedge Funds, Managerial Skill, And Macroeconomic Variables, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo
Hedge Funds, Managerial Skill, And Macroeconomic Variables, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Duplicate, see https://ink.library.smu.edu.sg/lkcsb_research/1867/. This paper evaluates hedge fund performance through portfolio strategies that incorporate predictability based on macroeconomic variables. Incorporating predictability substantially improves out-of-sample performance for the entire universe of hedge funds as well as for various investment styles. While we also allow for predictability in fund risk loadings and benchmark returns, the major source of investment profitability is predictability in managerial skills. In particular, long-only strategies that incorporate predictability in managerial skills outperform their Fung and Hsieh (2004) benchmarks by over 17 percent per year. The economic value of predictability obtains for different rebalancing horizons and alternative benchmark …
Quantitative Hedge Fund Selection, Melvyn Teo
Quantitative Hedge Fund Selection, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Prior research has shown that small funds, young funds, and local funds outperform their older, larger, and distant counterparts. According to the literature, hedge fund performance is driven by fund capacity constraints, managerial incentives, and local information. I revisit these studies on hedge funds and test whether their results hold up in recent data. By doing so, I lay the foundations for a quantitative hedge fund selection framework.
Hedge Funds And Analyst Optimism, Melvyn Teo
Hedge Funds And Analyst Optimism, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We find that analysts are more likely to issue favorable recommendations for stocks predominantly owned hedge funds. Moreover, these optimistic recommendations translate into poorer stock performance over the next three to six months. Hedge funds take advantage of these flattering reports by concurrently offloading their stock holdings. Our results suggest that analysts are reluctant to downgrade stocks held by their most important clients.
The Long And Short Of It: Evidence Of Year-End Price Manipulation By Short Sellers, Jesse Blocher, Joseph Engelberg, Adam V. Reed
The Long And Short Of It: Evidence Of Year-End Price Manipulation By Short Sellers, Jesse Blocher, Joseph Engelberg, Adam V. Reed
Research Collection BNP Paribas Hedge Fund Centre
We identify a setting in which there is a predictable incentive for short sellers to manipulate prices, and we find patterns consistent with short sellers manipulating prices. Specifically, we find that stocks with high short interest experience abnormally low returns on the last trading day of the year. This effect is strongest among stocks that are easily manipulated and during the last hour of trading. Further, this effect reverses at the beginning of the year, consistent with the temporary nature of price manipulation. We show that hedge funds’ portfolios are closely related to market-wide short interest, suggesting that hedge funds, …
Weathering The Storm: Asian Hedge Funds, Melvyn Teo
Weathering The Storm: Asian Hedge Funds, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
How has the financial crisis shaped the hedge fund industry in Asia? We survey the style, investment region, and assets under management landscape of Asia-based hedge funds before and after the recent economic downturn. Our findings suggest that during the early part of the crisis in 2007, macro and fixed income funds based in Australia were especially vulnerable. When Asian financial markets succumbed in 2008 and 2009, hedge fund exits ramped up in Singapore and Hong Kong, particularly amongst event driven and Japan-focused funds. Small funds were most susceptible to closure during the liquidity crunch. Conversely, CTAs and Greater China-focused …
Side-By-Side Management Of Hedge Funds And Mutual Funds, Tom Nohel, Z. Jay Wang, Lu Zheng
Side-By-Side Management Of Hedge Funds And Mutual Funds, Tom Nohel, Z. Jay Wang, Lu Zheng
Research Collection BNP Paribas Hedge Fund Centre
We examine situations where the same fund manager simultaneously manages mutual funds and hedge funds. We refer to this as side-by-side management. We document 344 such cases involving 693 mutual funds and 538 hedge funds. Proponents of this practice argue that it is essential to hire and retain star performers. Detractors argue that the temptation for abuse is high and the practice should be banned. Our analysis based on various performance metrics shows that side-by-side mutual fund managers significantly outperform peer funds, consistent with this privilege being granted primarily to star performers. Interestingly, side-by-side hedge fund managers are at best …
Hedge Fund Contagion, Melvyn Teo
Hedge Fund Contagion, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Why do correlations all go to one when economic conditions turn bad? We review the latest research on funding liquidity (the ease with which hedge funds obtain capital) and discuss its implications on the asset liquidity and valuations of securities held by funds, on subsequent fund performance, and on contagion across hedge fund investment styles.
Predicting Hedge Fund Performance With Style, Melvyn Teo
Predicting Hedge Fund Performance With Style, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
I apply the endogenous benchmark approach to the study of hedge funds. I find that including an investment style benchmark significantly reduces within style correlations in hedge fund residuals. Also, the performance spread between high past alpha t-statistic (a risk-adjusted information ratio) funds and low past alpha t-statistic funds increases dramatically when performance is measured relative to fund investment style. There appears to be valuable information in investment style performance that can aid in fund selection.
The Geography Of Hedge Funds, Melvyn Teo
The Geography Of Hedge Funds, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
This article analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asian-focused hedge funds. We find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72 percent per year. The local information advantage is pervasive across all major geographical regions, but is strongest for Emerging Market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. We show …
Lessons From Hedge Fund Fraud, Melvyn Teo
Lessons From Hedge Fund Fraud, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We examine two of the most fascinating fraud cases that rocked the hedge fund industry: Bernard L. Madoff Investment Securities and Bayou Management. From academic research and news reports, we distill important lessons for the hedge fund investor. Our key conclusions are (i) conflicts of interests are often symptomatic of more serious problems at hedge funds, (ii) auditing statements from obscure accounting firms should provide little assurance to investors, (iii) a comparison between the actual fund risk exposures based on realized returns with the theoretical risk exposures from the trading strategy serves as a useful cross-check for investors, and (iv) …
How Liquid Are Liquid Hedge Funds?, Melvyn Teo
How Liquid Are Liquid Hedge Funds?, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Many hedge funds impose minimal share restrictions and allow investors to redeem on a monthly basis or better. We find that there is significant variation in the liquidity risk exposure of these “liquid” funds. Within this group of funds, those that embrace liquidity risk outperform those that eschew liquidity risk by 4.86 percent per year. As a consequence of the liquidity risk exposure, funds experiencing outflows subsequently earn lower returns than funds receiving inflows. The effects of flows are more pronounced for funds employing leverage, for funds with high liquidity risk exposure, and during a liquidity crunch. These results underscore …
Liquidity And Hedge Funds, Melvyn Teo
Liquidity And Hedge Funds, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Market liquidity profoundly impacts hedge funds. Funds trading illiquid securities earns significant risk premium, report smoother returns, can better leverage on information asymmetries, and grapple with stronger capacity constraints. Importantly, the funding liquidity of hedge funds, or their ease of obtaining financing, can have a significant effect on the market liquidity of the securities they trade in, creating a downward liquidity spiral during economic downturns. We review the academic literature and deliver insights that resonate with recent market events.
Does Size Matter In The Hedge Fund Industry?, Melvyn Teo
Does Size Matter In The Hedge Fund Industry?, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We document a negative and convex relationship between hedge fund size and future riskadjusted returns. Small hedge funds outperform large hedge funds by 2.75 percent per year after adjusting for risk. This over performance cannot be explained by fund age, leverage, serial correlation, backfill bias, or incubation bias. The capacity constraints are not confined to the smallest funds, and manifest across various investment styles and regions. In particular, they are strongest for funds managed by multiple principals that trade small, illiquid securities, suggesting that the observed diseconomies can be traced to price impact and hierarchy costs (Stein, 2002). Interestingly, these …
How Surprising Are Returns In 2008? A Review Of Hedge Fund Risks, Melvyn Teo
How Surprising Are Returns In 2008? A Review Of Hedge Fund Risks, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
Many investors, expecting absolute returns, were shocked by the dismal performance of various hedge fund investment strategies in 2008. In this issue of the statistical digest, I review the academic literature on hedge fund risks and conduct some simple analyses. I find that many hedge funds, even those without directional equity exposure, have payoffs that resemble those from writing put options on equity indices. A central theme is that their strategies all involve being short liquidity. Therefore, these hedge funds tend to underperform during liquidity crises, which coincide with extreme bear markets.