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Full-Text Articles in Finance and Financial Management
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.
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 …
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 …
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.
Hedge Funds In A Volatile Market, Melvyn Teo
Hedge Funds In A Volatile Market, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
We show that relative to the first half of 2007, the volatility of hedge fund returns has doubled during the September 2007 to April 2008 period. At the same time, aggregate hedge fund returns have declined while exit rates have tripled. Commodity, macro, and, to a lesser extent, arbitrage funds outperformed during this period, while bottom-up funds underperformed. In Asia, funds engaging in less traditional strategies like arbitrage, event driven, fixed income, and distressed debt have emerged relatively unscathed. Our results also suggest that around the world, funds with headquarters near their investment markets, fewer assets under management, and higher …