Three Essays on Hedge Funds Characteristics, Performance, Risk and Managerial Incentives
| Author | : Ying Li |
| Publisher | : |
| Total Pages | : 142 |
| Release | : 2006 |
| Genre | : Commodity trading advisors |
| ISBN | : |
Three Essays On Hedge Funds Characteristics Performance Risk And Managerial Incentives
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Three Essays on Hedge Funds
| Author | : Christopher Schwarz |
| Publisher | : |
| Total Pages | : 140 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
The hedge fund industry and hedge fund related research have grown rapidly in the last decade. In 1990, hedge funds controlled an estimated $39 billion in assets. At the end of 2006, hedge funds had an estimated $1.72 trillion in assets under management. This dissertation consists of three essays exploring the hedge fund industry. In the first essay, I use the recent controversial and ultimately unsuccessful SEC attempt to increase hedge fund disclosure to examine the value of disclosure to investors. By examining SEC mandated disclosures filed by a large number of hedge funds in February 2006, I am able to construct a measure of operational risk distinct from market risk. Leverage and ownership structures as of December 2005 suggest that lenders and hedge fund equity investors were already aware of hedge fund operational risk characteristics. However, operational risk has no effect on the flow-performance relationship, suggesting that investors either lack this information, or they do not regard it as material. In the second essay, I examine hedge fund management and incentive fee structures and changes as well as the use of redemption fees. Overall, I find hedge funds' fee structures are related to their other fund characteristics in a manner consistent with the mutual fund area and previous fee theory. I observe management fees are negatively related to fund characteristics that lower administrative overhead and positively related to tax incentives. Incentive fees are positively correlated with return characteristics that raise the total values of managers' option-like incentive fee contracts. Hedge fund fee changes are found to be a function of pricing power and managers attempting to decrease investor demand in capacity constrained styles while redemption fees are used to protect managers against poor performance. Finally, funds of funds have positively associated incentive and management fees, which create a negative relationship between incentive fees and fund alphas. In the third essay, I examine if hedge fund managers close and reopen funds to investment to preserve performance. While my results show closed hedge funds do experience significantly lower flows, managers' and management companies' primary objective is to hoard assets. Hedge funds in capacity constrained styles do not close more often, do not close at lower relative asset levels and do not reopen at lower relative asset levels. Hedge funds reopen to investment to generate additional fees, not when funds are capable of generating out performance. These results suggest even high performance-pay deltas are not strong enough to overcome additional fees generated from larger amounts of assets. Other monitoring mechanisms are necessary to reduce agency costs for investors.
Three Essays on Hedge Fund Fee Structure, Return Smoothing and Gross Performance
| Author | : Shuang Feng |
| Publisher | : |
| Total Pages | : 131 |
| Release | : 2011 |
| Genre | : Hedge funds |
| ISBN | : |
Hedge funds feature special compensation structure compared to traditional investments. Previous studies mainly focus on the provisions and incentive structure of hedge fund contract, such as 2/20, hurdle rates, and high-water mark. The first essay develops an algorithm to empirically estimate the monthly fees, fund flows and gross asset values of individual hedge funds. We find that management fee is a major component in the dollar amount of hedge fund total fees, and fund flow is more important in determining the change in fund size compared to net returns, especially when fund is shrinking in size. We also find that best paid hedge funds concentrate in the largest hedge fund quintile. Large funds tend to perform better, earn more, and rely less on management fee for their managers' compensation. Further, we find that fund flow is an important determinant of hedge fund managerial incentives. Together with the "visible" hands of hedge fund management, i.e. the provisions of hedge fund incentive contracts, the "invisible" hands -- fund flows enable investors to effectively impact hedge fund managerial compensation and incentives. The second essay studies the relation between return smoothing and managerial incentives of hedge funds. We use gross returns to estimate both unconditional and conditional return smoothing models. While unconditional return smoothing is a proxy of illiquidity, conditional return smoothing is related to intentional return smoothing and may be used as a first screen for hedge fund fraud. We find that return smoothing is significantly underestimated using net returns, especially for the graveyard funds. We also find that managerial incentives are positively associated with both types of return smoothing. While managers of more illiquid funds tend to earn more incentive fees, funds featuring conditional return smoothing under-perform other funds and do not earn more incentive fees on average. Finally, we find that failed hedge funds feature more illiquidity and conditional return smoothing. The third essay explores the difference between the gross-of-fee and net-of-fee hedge fund performance, by investigating the difference in distribution, factor exposures and alphas between gross returns and net returns. We find that gross returns are distributed significantly differently from net returns. The gross-of-fee alphas are higher than the net-of-fee alphas by about 4% per year on average. We also find positive relation between hedge fund performance and fund size, fund flows, and managerial incentives, which holds for both gross-of-fee performance and net-of-fee performance. Our findings suggest that it is necessary to examine the gross-of-fee performance of hedge funds separately from the net-of-fee performance, which may give us a clearer picture of the risk structure and performance of hedge fund portfolios.
Three Essays on Hedge Funds
| Author | : Minli Lian |
| Publisher | : |
| Total Pages | : 224 |
| Release | : 2012 |
| Genre | : Hedge funds |
| ISBN | : |
Hedge funds are favoured by pension funds, institutional investors, and high wealth investors for their flexible investment trading strategies and possible diversification benefits with existing portfolios. The following three research papers help us understand certain hedge fund characteristics by examining fund performance and by making comparisons to other types of investments. The first essay investigates the relationship between hedge fund performance fees and risk adjusted returns. The paper introduces an "effort" variable and reasons that the performance of hedge funds and the payoff of the performance fee contract are endogenously determined by the fund manager's effort. The paper concludes that the performance fee contract aligns the interest of the fund manager and the investor, and creates a win-win risk sharing instead of a risk shifting situation. Empirically, we find that performance fees are positively associated with risk adjusted returns. The second essay examines the hedge fund tail risk in terms of the Value at Risk (VaR) and Expected Shortfall and compares these measures with those of mutual funds. It also studies the hedge fund tail risk dependence on the stock market index and VIX index as well as the phase-locking effect. The third essay studies the cross-sectional difference between hedge fund style indexes and industry portfolios. It also examines the diversification benefit of investing in a pool of hedge funds.
Three Essays on Hedge Funds
| Author | : Liping Qiu |
| Publisher | : |
| Total Pages | : 192 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
In Essay 1, we find that, on average, hedge funds decrease leverage prior to the beginning of the financial crisis, with leverage remaining below the pre-crisis levels. We also find that younger funds with lower current leverage and stricter fund governance are more likely to increase leverage following favorable performance; funds exposed to higher risk, higher management fee and higher current leverage tend to delever. Managers increase leverage in order to enhance future performance following superior returns only to be disappointed. We find mixed evidence on the performance difference between levered and unlevered funds, but levered funds do survive longer. In essays 2, we find that the presence of the management companies in their investment region is the most important source of the risk-adjusted performance. The funds with a presence in their investment region outperform other funds by 4.2 % per year. On average, 18% of the emerging market hedge funds have delivered positive and statistically significant alpha. Funds producing significant alphas experience greater capital inflows than the remainder. Have-alpha funds that experience high investor inflows do not have higher probabilities of being classified as beta-only funds nor have worse risk-adjusted returns in the future. In essay 3, we find that historical returns are routinely revised. About two-thirds of the hedge funds in our sample have revised their previously reported performance. On average, more than one-fifth of monthly returns were revised after being first reported. We find that positive revisions significantly outnumber negative revisions to returns of December. We also find an obvious decreasing time trend in both the number and proportion of return revisions, even after adjusting for performance report recency. We find a strong connection between return revisions and desirable fund characteristics such as strong fund governance at the overall fund level, the individual fund level, and the individual revision level. The revised funds outperform unrevised funds after revisions. Our findings suggest that correction may be a plausible explanation for the return revisions in hedge fund performance report. We have not found direct evidence that hedge fund managers manipulate returns.
Three Essays on the Performance Evaluation of Actively Managed Investment Funds
| Author | : Qing Yan |
| Publisher | : |
| Total Pages | : 240 |
| Release | : 2021 |
| Genre | : |
| ISBN | : |
This dissertation investigates the performance of hedge funds and actively managed U.S. equity mutual funds. The first chapter examines the relation between hedge funds and the low beta anomaly. Different conditions in the mutual fund and hedge fund industries should lead to different approaches with respect to the low beta anomaly. I find that, unlike most mutual funds, the average hedge fund tends to benefit considerably from the anomaly. About 2.3% per year of apparent alpha for the average hedge fund can be attributed to the low beta anomaly rather than manager skill. Low skill managers are the most reliant on the anomaly to generate returns, with the most reliant underperforming the least reliant by 5.9% per year. The second chapter uses machine learning to dynamically identify and optimally combine the predictors of hedge fund performance. The portfolio formed based on the machine learning models has an out-of-sample alpha of 7.8% per year. The importance of each predictor varies over time, but among the 22 predictors I consider, the consistently important predictors are average return, maximum return, alpha, systematic risk, and beta activity. Machine learning provides valuable, unique information about future hedge fund performance that is not captured by individual predictors. The third chapter studies whether the quality of fund risk management can predict fund performance. I find that the risk management skills of mutual fund managers-as quantified by their funds' maximum drawdowns-are persistent and predictive of subsequent risk-adjusted performance. Funds with relatively strong past performance and relatively low past maximum drawdowns have, on average, an out-of-sample alpha of 2.68% per year. That alpha is magnified when markets are turbulent-a time during which risk management skills should be most valuable. Investors are averse to drawdown risk. After controlling for typical measures of past performance, fund flows are still a decreasing function of maximum drawdowns, particularly among investors with greater risk aversion and during times of generally heightened risk aversion.
The World of Hedge Funds
| Author | : H. Gifford Fong |
| Publisher | : World Scientific |
| Total Pages | : 217 |
| Release | : 2005 |
| Genre | : Business & Economics |
| ISBN | : 9812563776 |
The World of Hedge Funds is a compendium of distinguished papers focusing on the cutting-edge analysis of hedge funds. This area is arguably the fastest growing source of funds in the investment management arena. It represents an exciting opportunity for the investor and manager in terms of the range of return and risk available. A source of rigorous analysis is therefore both sought after as well as needed. This book aims to fill this gap by presenting an eclectic collection of papers contributed by influential academics and practitioners covering the characteristics and problems of hedge funds.
Essays on the Structure, Performance, and Behavior of Hedge Funds
| Author | : Grant Farnsworth |
| Publisher | : |
| Total Pages | : |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
This dissertation contains three essays on the structure of hedge funds and the behavior of hedge fund managers and investors. In the first, I study the dynamics of changes in the leverage choices made by hedge fund managers and the implications for investors. Using SEC and commercial hedge fund database information, I examine the time-series and cross section of hedge fund leverage and find that, overall, hedge fund leverage changes are not driven by certain return-driven motivations, such as levering up before profitable times or in order to take advantage of concentrated investment opportunities. Instead, hedge fund leverage changes are driven primarily by risk mitigation measures, which may be imposed by external actors, such as prime brokers. Hedge funds lever down during volatile times and when risk spreads are high. Interestingly, when hedge fund leverage is perturbed by fund flows, I find no evidence that managers trade to return to a target leverage within four quarters. Thus overall hedge fund leverage may be the result of the fund's flow history, rather than predetermined leverage targets. In the second study, I examine hedge fund inceptions. New hedge funds may come into being because managers observe high demand for certain types of funds and create them to absorb this demand, or alternatively as a result of an innovative investment idea. I create empirical proxies that allow me to distinguish the two types of inceptions and show that funds that came about because of the supply of managerial investment from those that came about because of investor demand. Inceptions of the former type outperform those of the latter by a significant 4 to 5% annually over the first five years. In my third study, I use a special environment, a platform of hedge fund separate accounts, as a laboratory to examine the role of share restrictions and third-party evaluation in hedge fund returns. Separate accounts are tied to existing funds but have much lower share restrictions and feature third-party return evaluation. By comparing separate account and main fund returns for the same funds, I find that a reduction in share restrictions leads to a performance penalty of 1.7% per year. Also, the high liquidity and third party evaluation leads to reported returns that feature 33% less serial correlation. This latter result suggests that managers in the main fund use discretion in reporting practices to induce serial correlation in the reported returns of their main fund, which would lead to artificially good performance in risk-adjusted evaluation metrics for those funds.
Hedge Funds
| Author | : H. Kent Baker |
| Publisher | : Oxford University Press |
| Total Pages | : 697 |
| Release | : 2017-07-26 |
| Genre | : Business & Economics |
| ISBN | : 0190607386 |
Hedge Funds: Structure, Strategies, and Performance provides a synthesis of the theoretical and empirical literature on this intriguing, complex, and frequently misunderstood topic. The book dispels some common misconceptions of hedge funds, showing that they are not a monolithic asset class but pursue highly diverse strategies. Furthermore, not all hedge funds are unusually risky, excessively leveraged, invest only in illiquid asses, attempt to profit from short-term market movements, or only benefit hedge fund managers due to their high fees. Among the core issues addressed are how hedge funds are structured and how they work, hedge fund strategies, leading issues in this investment, and the latest trends and developments. The authors examine hedge funds from a range of perspectives, and from the theoretical to the practical. The book explores the background, organization, and economics of hedge funds, as well as their structure. A key part is the diverse investment strategies hedge funds follow, for example some are activists, others focusing on relative value, and all have views on managing risk. The book examines various ways to evaluate hedge fund performance, and enhances understanding of their regulatory environment. The extensive and engaging examination of these issues help the reader understands the important issues and trends facing hedge funds, as well as their future prospects.
Hedge Funds
| Author | : Vikas Agarwal |
| Publisher | : |
| Total Pages | : 120 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
Hedge funds have become increasingly important players in financial markets. This heightened importance has spawned a large academic literature focused on issues pertinent to hedge fund managers, investors, regulators, and policymakers. Although the top-4 finance journals (JF, JFE, RFS, and JFQA) published only 16 papers on hedge funds prior to 2005, they have published 105 papers on hedge funds since 2005. As a result, we felt that it is time to update the survey published in 2005. This update prepared with the help of a new coauthor, Kevin Mullally, extends the previous survey along two dimensions. First, it includes reviews of recent studies on topics that were covered in the earlier survey. Second, it summarizes research on new topics that were not part of the previous survey. These new topics cover a broad gamut of issues ranging from hedge funds' use of leverage and exposure to different risks to their impact on various asset markets.This survey consists of five broad sections. The first section reviews the literature examining both the time-series and cross-sectional variation in hedge fund performance. Time-series performance studies cover return generating processes, dynamic risk exposures, and determination of managerial skill. The second section covers studies focused on the cross-sectional relations between hedge funds' characteristics (including contractual features and time-varying features such as size and age) and fund performance. The third section analyzes the literature on the sources and nature of risks faced by hedge fund investors. In particular, we discuss risks that can arise from managerial incentives and sources of capital. The fourth section summarizes research on the role of hedge funds in the financial system. Specific topics here include hedge funds' impact on systemic risk, asset prices, and liquidity provision in financial markets. The fifth and final section focuses on potential biases and limitations of hedge fund data sources.
