Mutual/Hedge Funds

Does hedge fund outperformance derive from systematically superior timing or from superior asset selection? In the December 2010 version of her paper entitled “Can Factor Timing Explain Hedge Fund Alpha?”, Hyuna Park decomposes alpha generated by hedge funds into security selection and timing with respect to eight risk factors (including U.S. and emerging equity risk premiums). Her essential measure of  factor timing performance is degree of fund success in raising (lowering) exposure to a factor when the factor’s return is high (low). For example, a fund with a high equity market beta when stock returns are high and low equity market beta when stock returns are low demonstrates good timing of the equity risk premium. She gives special attention to relatively illiquid hedge funds to ensure that frequent trading does not obscure factor timing ability and considers both aggregate and individual fund performances. Using net returns and other characteristics for 6,114 live and dead hedge funds during 1994-2008, she finds that: Keep Reading

Funds of hedge funds (FoF) diversify investments across hedge funds to achieve steady return streams. Some FoFs diversify within a single hedge fund strategy (category), while others diversify both within and across hedge fund categories. Does the latter enhanced approach to diversification outperform the former? In their December 2010 paper entitled “Diversification Strategies and the Performance of Funds of Hedge Funds”, Na Dai and Hany Shawky contrast the performances of FoFs that diversify within one category versus those that diversify both within and across categories. Using monthly performance data for two broad samples of live and dead FoFs with different diversification metrics spanning 1994 through 2008, they find that: Keep Reading

Do European-listed equity index funds predictably underperform their benchmarks by the amount of total expenses, as do U.S.-listed counterparts? In the May 2010 update of their paper entitled “The Performance of European Index Funds and Exchange-Traded Funds”, David Blitz, Joop Huij and Laurens Swinkels investigate the magnitude and sources of underperformance of European index mutual funds and exchange-traded funds (ETF) relative to benchmark indexes. Using return and expense data for a sample of 40 European-listed passive funds of interest to global equity investors, and their underlying indexes, spanning January 2003 through December 2008, they find that: Keep Reading

Do documented streaks of market outperformance occur more often than would be expected by chance, thereby supporting belief in investing skill? In their August 2010 paper entitled “Differentiating Skill and Luck in Financial Markets With Streaks”, Andrew Mauboussin and Samuel Arbesman compare actual streaks of mutual fund outperformance relative to the S&P 500 Index to results of 10,000 “no-skill” simulation trials to measure whether skill exists. The simulation assumes that both the number of fund-years per year and the probability that a fund would beat the S&P 500 Index during a year are the same as observed across a large sample of active mutual funds. Using monthly returns for 5,593 actively managed, large-capitalization U.S. mutual funds spanning 1962-2008 (50,693 fund-years), they find that: Keep Reading

Are a CFA designation, an MBA degree and experience critical success factors for fund managers? In their July 2010 paper entitled “Are You Smarter than a CFA’er? Manager Qualifications and Portfolio Performance”, Oguzhan Dincer, Russell Gregory-Allen and Hany Shawky examine the impact of having an MBA, a CFA and/or investment experience on investment manager performance. They control for market conditions and investing style and seek robustness of results by using five portfolio performance and two risk measures. Using fund performance data and manager characteristics for a sample of 890 managed equity and fixed income portfolios free of survivorship bias over the relatively calm period of 2005-2007, they find that: Keep Reading

What hedge fund characteristics are most indicative of performance persistence? In the July 2010 version of their paper entitled “Hedge Fund Characteristics and Performance Persistence”, Manuel Ammann, Otto Huber and Markus Schmid investigate hedge fund performance persistence over future horizons of six to 36 months based on portfolios of hedge funds formed via double sorts on past performance and another fund characteristic. The other fund characteristics they consider are: size; age; relative funds flow; closure to new investments; length of withdrawal notice period; length of redemption period; management and incentive fees; leverage; management personal investment; and, a Strategy Distinctiveness Index (SDI) defined as a strategy-normalized form (ten different strategy types) of one minus the R-squared of monthly returns regressed against an equally-weighted strategy index over the prior two years. Using characteristics and groomed performance data for a broad sample of hedge funds over the period 1994-2008, they find that: Keep Reading

Are the performances of individual hedge funds exploitably predictable? In the July 2010 version of their paper entitled “Hedge Fund Predictability Under the Magnifying Glass: The Economic Value of Forecasting Individual Fund Returns”, Doron Avramov, Laurent Barras and Robert Kosowski investigate whether investors can exploit the predictability of individual hedge fund returns. They consider four potential predictors: (1) the default spread (between Moody’s BAA and AAA rated bonds); (2) the broad stock market dividend yield; (3) the implied volatility of the S&P 500 Index (VIX); and, (4) the monthly net aggregate flow into the hedge fund industry. Using monthly values of these predictors, commonly used hedge fund risk factors and returns for 7,991 individual hedge funds in ten distinct categories over the period 1994-2008, they find that: Keep Reading

How exposed are hedge funds to “rogue” correlations, wherein returns of assets or asset classes that normally exhibit hedging cancellation instead exhibit hedge-killing reinforcement? In the June 2010 version of their paper entitled “‘When There Is No Place to Hide’: Correlation Risk and the Cross-Section of Hedge Fund Returns”, Andrea Buraschi, Robert Kosowski and Fabio Trojani investigate the exposure of hedge funds to correlation risk (risk of unexpected changes in the correlation between the returns of different assets or asset classes) and the implications of this risk for hedge fund returns. Using data for actual one-month-to-maturity  S&P 500 correlation swaps (based on daily implied versus realized correlation), individual S&P 500 stock and index put and call options and a broad sample of 8,710 individual hedge funds spanning in combination January 1996 through December 2008, they find that: Keep Reading

Does media coverage of hedge funds indicate their values as investments? In their July 2010 paper entitled “Media and Investment Management”, Gideon Ozik and Ronnie Sadka investigate the level and investment implications of media bias by applying textual analysis to titles of articles from three types of news coverage about equity hedge funds (General newspapers, Specialized investment magazines, and Corporate communications). They frame their investigation by hypothesizing three aspects of bias: reporting style, editorial selection and content. Using the Google News archive to collect approximately 67,000 news articles from about 3,600 unique media sources on a sample of 774 long/short U.S. equity hedge funds over the period 1999-–2008, they find that: Keep Reading

A reader requested comments on the paper “Why Do Closed-End Bond Funds Exist?” by Edwin Elton, Martin Gruber, Christopher Blake and Or Shachar. This study investigates the unique aspects of closed-end bond funds using characteristics and performance data mostly from 1996-2006 for two samples: (1) 54 pairs of closed-end and open-end bond funds matched for manager, fund family and type of bond fund; and, (2) 332 closed-end bond funds. The essence of their findings (from the “Conclusions” section of the paper) is: Keep Reading