Mutual/Hedge Funds

Can outperforming hedge funds readily convert assets into cash for fund investors? In their October 2008 paper entitled “Hedge Fund Alphas: Do They Reflect Managerial Skills or Mere Compensation for Liquidity Risk Bearing?”, Rajna Gibson and Songtao Wang study the effect of market-wide liquidity risk (the time and costs of transforming a given position into cash and vice versa) on the performance of various hedge fund portfolio strategies. The strategies they consider are: Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Event-Driven, Fixed Income Arbitrage, Global Macro, Long/Short Equity Hedge, Managed Futures and Multi-Strategy. Using performance data for a broad sample of live (2,743) and defunct (1,955) hedge funds during 1994-2006 and contemporaneous measures of market-wide (U.S. equities) liquidity, they conclude that: More…

Do expert investors outperform more by being in the right sectors (top-down economic analysis) or by picking the right stocks (bottom-up firm analysis)? In their November 2008 paper entitled “Impact of Sector Versus Security Choice on Equity Portfolios”, Jason Hall and Ben McVicar investigate the relative impact on equity mutual fund returns of industry sector allocation versus individual stock picks. They perform this investigation by constructing sector-neutral and stocks-within-sector-neutral benchmarks. Using data for 3,350 U.S. equity mutual funds over the period 1980-2005 (113,614 fund-quarter observations), they conclude that: More…

Do Exchange Traded Funds (ETF) outperform comparable index mutual funds because of lower fees? In their November 2008 preliminary paper entitled “Exchange Traded Funds: Performance and Competition”, Marko Svetina and Sunil Wahal examine the performance of a very large number of ETFs over their entire histories relative both to their theoretical indexes and to matched index mutual funds. Using data for 584 domestic equity, international equity and fixed income ETFs and their indexes from their inception to the end of 2007, along with comparable data for matched index mutual funds, they conclude that: More…

Exceptional performance can stem from: (1) doing something others are doing, but doing it better; and (2) doing something different. Do hedge funds that have innovative strategies (do something different) systematically outperform? In their August 2008 paper entitled “Strategy Distinctiveness and Hedge Fund Performance”, Ashley Wang and Lu Zheng construct a “Hedge Fund Strategy Distinctiveness Index” (SDI) and test the predictive power of this index for future hedge fund returns. Specifically, they define SDI as [1 - R-squared] from a two-year regression of the returns for an individual hedge fund against the average returns of funds with the same investing style. This index represents the percentage of variation in a fund’s returns not explained by the variation of its peer’s returns. Using monthly return data for 2767 live and dead hedge funds over the period January 1994 through June 2007, they conclude that: More…

Can investors count on continued outperformance from hedge funds with exceptionally strong recent returns? In their July 2008 paper entitled “The Performance Persistence of Equity Long/Short Hedge Funds”, Markus Schmid and Samuel Manser apply a flexible portfolio-based approach to investigate the persistence of raw and risk-adjusted returns for long/short equity hedge funds. Using return and holdings data for 1,150 long/short equity hedge funds over the period 1994-2005, they conclude that: More…

Do expense ratios for actively managed equity mutual funds represent pay for performance or pay for something else? In their July 2008 paper entitled “Performance and Characteristics of Actively Managed Retail Mutual Funds with Diverse Expense Ratios”, John Haslem, Kent Baker and David Smith investigate factors determining the performance of actively managed retail equity mutual funds, with emphasis on expense ratios. Using characteristics and return data for 1,779 actively managed U.S. equity mutual funds segmented by Morningstar category and contemporaneous returns for category-matched Russell indexes, they conclude that: More…

Should investors shift from traditional long-only mutual funds to newer and more flexible 130/30 (130% long/30% short) equity funds? In other words, does the flexibility of 130/30 funds to short stocks and expand portfolios enhance returns? In the May 2008 version of his paper entitled “130/30 Investing: Just Another Hype or Here to Stay?”, David Blitz enumerates theoretical advantages and disadvantages of 130/30 investing and discusses ways in which 130/30 fund managers are implementing their flexibility, concluding that: More…

Should investors avoid mutual funds that charge redemption fees, or is there a good reason to accept this explicit hit to liquidity? In other words, do these fees protect underperforming fund managers or long-term investors? In their recent paper entitled “Redemption Fees: Reward for Punishment”, David Nanigian, Michael Finke and William Waller study the impact of short-term redemption fees on long-term fund performance based on fee size and duration (effective time interval of the redemption fee after purchase). Using monthly after-tax returns for a very large sample of open-end US equity mutual funds over the period July 2003 to May 2007, they conclude that: More…

Do strong incentives for new hedge fund managers and small-fund nimbleness translate to outperformance for new funds? In the January 2008 draft of their paper entitled “The Performance of Emerging Hedge Fund Managers”, Rajesh Aggarwal and Philippe Jorion analyze the performance of new hedge funds, emphasizing avoidance of backfill bias. New fund managers may at their discretion “back fill” past performance when they decide to start reporting fund performance. The authors account for the potential bias of favorable backfilling by assembling a sample of funds with inception dates within 180 days of first report dates. Using return data for the resulting sample of 923 (both live and dead) hedge funds that are new over the period 1996-2006, they conclude that: More…

Are there exploitable differences in returns for stocks with heavy versus light institutional trading activity? In his March 2008 paper entitled “Trader Composition and the Cross-Section of Stock Returns”, Tao Shu analyzes the impact of institutional trading activity on the returns of individual stocks and on the strength of the momentum effect, post earnings-announcement drift (PEAD), the value premium and the investment effect. He calculates institutional trading activity at a quarterly frequency by dividing the aggregate absolute change in reported institutional holdings of a stock by the contemporaneous total quarterly trading volume for the stock. Using holdings data as reported via SEC Form 13F and associated stock trading volume and return data for the period 1980-2005, he concludes that: More…