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Mutual/Hedge Funds

Do investors in mutual funds and hedge funds get their fair share of returns, or are they perpetually disadvantaged by fees and underperforming fund managers? Are there ways to exploit fund behaviors? These blog entries relate to mutual funds and hedge funds.

Outperformance Streaks and Mutual Fund Manager Skill

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

CFA or MBA or School of Hard Knocks?

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

Indicators of Hedge Fund Performance Persistence

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

Exploiting Predictability of Individual Hedge Funds

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

Rogue Waves and Hedge Fund Returns

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

Exploit Media Bias in Hedge Fund Coverage?

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

Closed-End Versus Open-End Bond Funds

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

Hedge Fund High Water Mark Probability and Persistence

What is the likelihood that a hedge fund will achieve a new high water mark in a given month? Are high water marks streaky? In their April 2010 paper entitled “Persistence Analysis of Hedge Fund Returns”, Serge Amvella, Iwan Meier and Nicolas Papageorgiou investigate performance relative to high water mark by hedge fund strategy class. (See the table “Hedge Fund Strategy Classifications” from Hedge Fund Research, Inc., the source of data for the study, for imperfectly matched descriptions of hedge fund classes.) Using monthly net-of-fee returns for 4,783 funds hedge funds across 20 strategy classes spanning January 1994 through December 2007, they find that: Keep Reading

Lagged Cloning of Mutual Funds

Do clones of mutual funds derived from SEC filings do as well as the funds themselves? In their February 2010 preliminary paper entitled “Better than the Original? The Relative Success of Copycat Funds”, Yu Wang and Marno Verbeek construct hypothetical clones to investigate the performance of a free-riding strategy that duplicates the disclosed asset holdings of actively managed mutual funds, reformed on each filing date. Using periodically disclosed holdings of 3,046 active U.S. mutual funds during 1985-2008  (24 years), they find that: Keep Reading

Newsworthy Hedge Funds Underperform?

Do hedge funds covered by the news media underperform “hidden gems?” In their March 2010 paper entitled “Does Recognition Explain The Media-Coverage Discount? Contrary Evidence From Hedge Funds”, Gideon Ozik and Ronnie Sadka examine the effects of media coverage on future hedge fund performance. Using results of 80,000 monthly searches of the Google News archive and monthly return data for 978 hedge funds spanning 1999-2008, they conclude that: Keep Reading

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