Mutual/Hedge Funds

When hedge funds publicly demand that management of firms in which the funds hold large stakes take steps to improve stock prices, should other investors take notice? Do such demands distract or focus management regarding shareholder interests? In the November 2006 draft of their paper entitled “Hedge Fund Activism, Corporate Governance, and Firm Performance”, Alon Brav, Wei Jiang, Frank Partnoy and Randall Thomas investigate the relationship between hedge fund activism and stock returns. They identify instances of fund activism by (1) searching 2001-2005 news databases for stories mentioning both “activism” and “hedge fund” and (2) analyzing associated SEC Schedule 13D filings, with special attention to the reasons for the transactions as stated in the filings. Using the resulting set of 888 events involving 131 funds and 775 companies, they conclude that: Keep Reading

How well do experts perform in timing individual stock trades? In their May 2007 paper entitled “Individual Security Timing Ability and Fund Manager Performance”, David Gallagher, Andrew Ross and Peter Swan define individual security timing ability as the proportion of potential returns obtained by a trader over the holding period and measure this ability for a set of active Australian equity fund managers. Using a unique database of daily trades and monthly portfolio holdings for 30 fund managers from January 1996 through December 2001, they conclude that: Keep Reading

Are hedge fund managers the best and brightest when it comes to stock picking and market timing? In their March 2007 paper entitled “How Smart are the Smart Guys? A Unique View from Hedge Fund Stock Holdings”, John Griffin and Jin Xu investigate whether hedge fund managers are better at picking stocks and investing styles than mutual fund managers. Using the stock holdings of 306 hedge fund companies from 1980 to 2004 as reported in quarterly SEC Form 13F equity filings, they conclude that: Keep Reading

Do real live hedge funds beat mechanical trading systems designed to replicate their statistical return distribution and diversification properties? In their February 2007 paper entitled “Replication-Based Evaluation of Hedge Fund Performance”, Harry Kat and Helder Palaro update their comparison of the after-fee performances of a wide range of hedge funds to the performances of mechanical replicants. In short, they attempt to isolate true hedge fund outperformance by pitting each actual fund against a replicant that mechanically trades a basket of Eurodollar, 5-year note, 10-year note, S&P 500, Russell 2000 and GSCI futures. Their replication process assumes an existing investor portfolio (to be hedged) that is 50% S&P 500 index and 50% long-term T-bonds. Using return data for 2073 individual hedge funds and 875 funds of hedge funds through November 2006, they find that: Keep Reading

How are hedge funds like, and not like, mutual funds? How is the hedge fund industry likely to evolve? In his February 2007 paper entitled “Hedge Funds: Past, Present and Future”, Rene Stulz compares the performance and risks of hedge funds to those of mutual funds and examines the likelihood that hedge funds will become more like mutual funds in the future. Based on a review of relevant research, he concludes that: Keep Reading

What are an investor’s chances of reaping abnormal returns from mutual funds? Is it possible to identify the funds that will outperform? In their December 2006 paper entitled “Mutual Fund Performance”, Keith Cuthbertson, Dirk Nitzsche and Niall O’Sullivan address these questions via review of past academic research on US and UK managed mutual funds, with focus on studies done within the last 20 years. They conclude that: Keep Reading

Do investors/traders taking cues from the trades of top performers produce the momentum effect? In his December 2006 paper entitled “Follow the Leader: Peer Effects in Mutual Fund Portfolio Decisions”, Lukasz Pomorski investigates whether actively managed equity mutual funds tend to follow the stock trading leads of outperforming peers as the picks become known via the media and quarterly filings. He defines outperforming (leader) funds in two ways: (1) funds with alphas in the top 5% over the past two years, and (2) funds on the Forbes Honor Roll (high media exposure). He calculates overall leader activity in a stock based only on trades by leader funds with a position in the stock. Using mutual fund holdings and performance data for 1980-2003 (96 quarters), he finds that: Keep Reading

When investors shop for mutual funds internationally, what variables should they consider as indicators of potential outperformance? In their November 2006 paper entitled “The Determinants of Mutual Fund Performance: A Cross-Country Study”, Miguel Ferreira, Antonio Miguel and Sofia Ramos relate risk-adjusted performance for mutual funds around the world to: (1) fund characteristics such as size, age, fees (initial charges, annual charges, and redemption charges), management structure and management tenure; (2) country variables, such as economic development, financial development and investor protection; and, (3) management geographic familiarity via segmentation into domestic, foreign and global funds. Using a sample of 10,568 open-end actively managed equity funds from 19 countries for the period 1999-2005, they conclude that: Keep Reading

Do mutual fund investors pay for performance, or for something else? Are some of them oblivious to fund performance? In their November 2006 paper entitled “Yet Another Puzzle? The Relation between Price and Performance in the Mutual Fund Industry”, Javier Gil-Bazo and Pablo Ruiz-Verdu explore the relationship between mutual fund fees and before-fee performance. Using monthly data for diversified and seasoned U.S. domestic equity mutual funds during 1961-2003 (538,813 fund-month observations), they find that: Keep Reading

Can quantitative analysts replicate the statistical performance of a given hedge fund using a set of easily tradable assets, thereby: (1) recreating the “hedge” as a transparent, liquid and cheap trading system; and, (2) establishing benchmarks truly applicable to specific hedge fund performance? In their June 2005 paper entitled “Hedge Fund Returns: You Can Make Them Yourself!”, Harry Kat and Helder Palaro describe and illustrate a statistical fund replication process. In their February 2006 paper entitled “Superstars or Average Joes? A Replication-Based Performance Evaluation of 1917 Individual Hedge Funds”, they compare the performance of hedge funds to the performance of their mechanical replicants. And, in their October 2006 paper entitled “Tell Me What You Want, What You Really, Really Want! An Exercise in Tailor-Made Synthetic Fund Creation”, they present out-of-sample tests of synthetic hedge funds with specific properties. Following are some highlights from these three papers: Keep Reading