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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.

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

Quantitative Versus Qualitative Hedge Funds

Do quants outperform quals? In his January 2010 preliminary draft paper entitled “A Comparison of Quantitative and Qualitative Hedge Funds”, Ludwig Chincarini compares the performance characteristics of quantitative and qualitative hedge funds. Using return data and strategy descriptions spanning a total of 6,352 hedge funds over the period January 1970 through June 2009 and risk factor adjustment data for a January 1994 through March 2009 subperiod, he concludes that: Keep Reading

Is Voluntarily Reported Performance Data Misleading?

Are hedge fund industry performance metrics, which are based on voluntarily reported data, materially unrepresentative? In their November 2009 draft paper entitled “Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases”, Adam Aiken, Christopher Clifford and Jesse Ellis compare directly the performances of funds that choose to report and funds that do not. They calculate return data for non-reporting funds by examining the holdings described in SEC filings of 117 publicly listed (registered) funds of hedge funds. Using quarterly return data for reporting and non-reporting hedge funds spanning 2000-2008, they conclude that: Keep Reading

Quantifying the Penalty of Hedge Fund Withdrawal Restrictions

Should hedge fund investors worry about withdrawal restrictions (lockup period, redemption notice period and redemption frequency constraint)? In the November 2009 update of their paper entitled “Being Locked Up Hurts”, Frans de Roon, Jinqiang Guo, and Jenke ter Horst apply Modern Portfolio Theory to model optimal asset allocations for an investor choosing among the risk-free asset (1-month Treasury bill), stocks (value-weighted NYSE equity index), bonds (Fama Bond Portfolio) and a fund of hedge funds (HFRI Fund of Funds composite index) with and without a withdrawal restriction (lockup) period. The essential assumption is that the portfolio efficiency goal requires rebalancing at an interval shorter than the lockup period (in the study, one month versus three months). Using data spanning January 1990 through December 2007 (18 years), limited by hedge fund data availability, they conclude that: Keep Reading

Timing Ability of Bond Mutual Fund Managers

Do managers of bond mutual funds generate value for fund holders by successfully timing the market? In the September 2009 update of their paper entitled “Measuring the Timing Ability and Performance of Bond Mutual Funds”, Yong Chen, Wayne Ferson and Helen Peters evaluate the ability of U.S. bond fund managers to time nine common factors related to bond returns. The nine factors reflect the term structure of interest rates, credit and liquidity spreads, currency exchange rates, mortgage spread and equity market returns. The authors also define seven benchmarks matching different bond fund styles. Using monthly returns for more than 1,400 U.S. bond mutual funds and contemporaneous bond market factor and benchmark data during January 1962 through March 2007, they conclude that: Keep Reading

Mutual Fund Momentum Measure Fly-off

Which measure of mutual fund momentum best predicts future fund returns? In his August 2009 paper entitled “The 52-Week High, Momentum, and Predicting Mutual Fund Returns”, Travis Sapp examines the intermediate-term future performance of mutual funds ranked by: (1) nearness to the one-year high of the fund share net asset value; (2) prior six-month fund return; and, (3) fund sensitivity to stock return momentum. Using mutual fund returns for a broad sample of U.S. common stock funds and risk-adjustment data over the period 1970-2004, he concludes that: Keep Reading

Due Diligence on Hedge Funds

What does due diligence discover about hedge funds? If outperformance attracts due diligence investigations, does this outperformance persist after the investigations? In the June 2009 draft of their paper entitled “Trust and Delegation”, Stephen Brown, William Goetzmann, Bing Liang and Christopher Schwarz characterize the findings of formal hedge fund due diligence investigations and measure their timing with respect to fund performance. Using a sample of 444 hedge fund due diligence reports (typically 100-200 pages each) from a major hedge fund due diligence firm spanning 2003-2008, along with associated fund performance data, they conclude that: Keep Reading

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