Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011 ◽  
Vol 46 (4) ◽  
pp. 1073-1106 ◽  
Author(s):  
Yong Chen
Keyword(s):  
Risk Reduction ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Market Risk ◽  
Risk Shifting ◽  
Large Sample ◽  
Event Risk ◽  
Market State ◽  
Fund Industry

AbstractThis paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

Conditional Return Smoothing in the Hedge Fund Industry

2008 ◽  
Vol 43 (2) ◽  
pp. 267-298 ◽  
Author(s):  
Nicolas P. B. Bollen ◽  
Veronika K. Pool
Keyword(s):  
Hedge Funds ◽  
Serial Correlation ◽  
Hedge Fund ◽  
Cash Flows ◽  
Capital Flight ◽  
Present Evidence ◽  
Large Sample ◽  
Leading Indicator ◽  
Return Smoothing ◽  
Fund Industry

AbstractWe show that if true returns are independently distributed and a manager fully reports gains but delays reporting losses, then reported returns will feature conditional serial correlation. We use conditional serial correlation as a measure of conditional return smoothing. We estimate conditional serial correlation in a large sample of hedge funds. We find that the probability of observing conditional serial correlation is related to the volatility and magnitude of investor cash flows, consistent with conditional return smoothing in response to the risk of capital flight. We also present evidence that conditional serial correlation is a leading indicator of fraud.

Portraits of five hedge fund fraud cases

2008 ◽  
Vol 15 (2) ◽  
pp. 179-213 ◽  
Author(s):  
Majed R. Muhtaseb ◽  
Chun Chun “Sylvia” Yang
Keyword(s):  
Asset Management ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Investment Fund ◽  
Good Opportunity ◽  
Content Type ◽  
Fund Managers ◽  
Management Group ◽  
Fund Industry ◽  
Asset Managers

PurposeThe purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.Design/methodology/approachThe paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.FindingsThe five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.Originality/valueThis is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.

Hedge Fund Activism vs Other Activist Investors

2021 ◽  
pp. 252-282
Author(s):  
Ulf von Lilienfeld-Toal ◽  
Jan Schnitzler
Keyword(s):  
Empirical Analysis ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Empirical Literature ◽  
Comparative Approach ◽  
Large Sample ◽  
Shareholder Proposals ◽  
Target Firms ◽  
Hedge Fund Activism ◽  
The Impact

This chapter reviews the growing empirical literature on shareholder activism by hedge funds. The aim is a comparative approach contrasting the impact of hedge fund activism on target firms with outcomes for other types of activist investors. Following recent research, the chapter provides an empirical analysis based on the disclosure of equity blockholdings by activist investors in a large sample of all US listed companies. In addition, it summarizes which types of investors engage in other events linked to activism, such as takeovers, proxy contests, or shareholder proposals. Overall, there is evidence that not only hedge funds but also other types of investors can be effective monitors, but there are nuanced differences with respect to targeting decisions and payout policies.

PONZI FINANCE AND THE HEDGE FUND INDUSTRY

2012 ◽  
Vol 15 (supp02) ◽  
pp. 1250037
Author(s):  
WILLI SEMMLER ◽  
RAPHAELE CHAPPE
Keyword(s):  
European Union ◽  
Dynamic Model ◽  
Asset Management ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Stochastic Dynamic ◽  
The European Union ◽  
Obama Administration ◽  
Regulatory Frameworks ◽  
Fund Industry

This paper presents a stochastic dynamic model that can be used to describe situations in asset management where hedge funds may inadvertently find themselves running a Ponzi financing scheme. Greater transparency is necessary to reduce such opportunities, such as audited financials, and disclosure of valuation methodologies. In that respect, new regulatory frameworks enacted by the Obama administration and the European Union are welcome developments.

scholarly journals Opacity in Hedge Funds: Does it Create Value for Investors and Managers?

2020 ◽  
Vol 17 (6) ◽  
pp. 640-668
Author(s):  
Flávia Januzzi ◽  
Aureliano Bressan ◽  
Fernando Moreira
Keyword(s):  
Value Creation ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Portfolio Allocation ◽  
Positive Relation ◽  
Monthly Basis ◽  
Comprehensive Database ◽  
Performance Fees

This paper investigates if opacity (as measured by derivatives usage) creates value for investors and the managers of hedge funds that charge performance fees. Since we do not identify a positive relation between opacity and managers’ revenue, it is not possible to state that opacity is a source of manager’s value creation for hedge fund investors and managers. However, considering that opacity is positively associated with risk-taking and negatively related with investors’ adjusted returns, we suggest policies aiming at protecting investors, especially those less qualified. We examine a unique and comprehensive database related to the positions in derivatives taken by managers, which was enabled due to specific disclosure regulatory demands of the Brazilian Securities Exchange Commission, where detailed information on hedge funds’ portfolio allocation should be provided on a monthly basis.

Hedge Fund Regulation

2017 ◽  
Author(s):  
Wulf A. Kaal ◽  
Dale A. Oesterle
Keyword(s):  
United States ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Private Investment ◽  
The United States ◽  
Regulatory Framework ◽  
Securities Regulation ◽  
Investment Fund ◽  
Investment Funds ◽  
Fund Industry

The hedge fund industry in the United States has evolved from a niche market participant in the early 1950s to a major industry operating in international financial markets today. Hedge funds in the United States began as privately held and privately managed investment funds, unregistered and exempt from federal securities regulation. An increasing investor demand for hedge funds and substantial growth of the hedge fund industry resulted in a tectonic shift in the regulatory framework applicable to the industry via the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act. This chapter summarizes the evolution of the regulatory framework governing the hedge fund industry. It focuses on the registration and disclosure provisions added by the Dodd-Frank Act and several other regulatory innovations, including the Jumpstart Our Business Startups (JOBS) Act and proposals for tax reform of the private investment fund industry.

Compensation and Incentives in Hedge Funds

2017 ◽  
Author(s):  
Garrett C. C. Smith ◽  
Gaurav Gupta
Keyword(s):  
Risk Taking ◽  
Hedge Funds ◽  
Bargaining Power ◽  
Hedge Fund ◽  
High Water ◽  
Fund Managers ◽  
Fee Structure ◽  
Relative Bargaining Power ◽  
Structure Research ◽  
Subsequent Risk

Although hedge funds typically report a 2 and 20 fee structure, some investors want to change this standard practice. Many funds sustained substantial losses as a result of the financial crisis of 2007–2008. Given the strategies used by hedge funds, they were not supposed to incur large losses. Subsequent underperformance to equity during the bull market recovery left many investors questioning the fee structure. Research shows the fee structure is more fluid than typically reported. The reluctance of many hedge fund managers to appear weak perpetuates the reported 2 and 20 fee structure. Fees respond to the relative bargaining power between managers and investors. Some investors speculate that the fee structure encourages managers to undertake high-risk strategies. However, fees and other incentive provisions, such as a high-water mark, provide better opportunities for talented managers to enter the industry, mitigating their subsequent risk-taking.

Hedge Funds and Limited Partnership Agreements

2021 ◽  
pp. 86-110
Author(s):  
Na Dai
Keyword(s):  
Financial Crisis ◽  
Current Literature ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
2008 Financial Crisis ◽  
Limited Partnership ◽  
Fund Managers ◽  
The 2008 Financial Crisis

Due to the lack of regulations in the hedge fund industry and the great discretion given to hedge fund managers during the daily operations, limited partnership agreements are the most important if not the only tool for investors to incentivize and monitor hedge fund managers and protect their own interests. This chapter reviews the current literature on hedge funds contractual terms and their implications for fund performance and risk taking, before discussing the variation of the contracts conditional on the jurisdiction of the hedge fund. Finally, the development of hedge funds limited partnership agreements is investigated as many jurisdictions have imposed new regulations on hedge funds after the 2008 financial crisis.

Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry

2016 ◽  
Vol 51 (6) ◽  
pp. 1991-2013 ◽  
Author(s):  
David M. Smith ◽  
Na Wang ◽  
Ying Wang ◽  
Edward J. Zychowicz
Keyword(s):  
Hedge Funds ◽  
Lower Risk ◽  
Market Timing ◽  
Hedge Fund ◽  
Technical Analysis ◽  
Fund Managers ◽  
Short Sale ◽  
Timing Ability ◽  
Fund Industry

This article presents a unique test of the effectiveness of technical analysis in different sentiment environments by focusing on its usage by perhaps the most sophisticated and astute investors, namely, hedge fund managers. We document that during high-sentiment periods, hedge funds using technical analysis exhibit higher performance, lower risk, and superior market-timing ability than nonusers. The advantages of using technical analysis disappear or even reverse in low-sentiment periods. Our findings are consistent with the view that technical analysis is relatively more useful in high-sentiment periods with larger mispricing, which cannot be fully exploited by arbitrage activities because of short-sale impediments.

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