Hedge Fund Performance Evaluation under the Stochastic Discount Factor Framework

2016 ◽  
Vol 51 (1) ◽  
pp. 231-257 ◽  
Author(s):  
Haitao Li ◽  
Yuewu Xu ◽  
Xiaoyan Zhang
Keyword(s):  
Performance Evaluation ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
Discount Factor ◽  
Stochastic Discount Factor ◽  
Wide Range ◽  
Fund Performance Evaluation ◽  
Equity Funds ◽  
Hedge Fund Performance

AbstractWe study hedge fund performance evaluation under the stochastic discount factor framework of Farnsworth, Ferson, Jackson, and Todd (FFJT). To accommodate dynamic trading strategies and derivatives used by hedge funds, we extend FFJT’s approach by considering models with option and time-averaged risk factors and incorporating option returns in model estimation. A wide range of models yield similar conclusions on the performance of simulated long/short equity hedge funds. We apply these models to 2,315 actual long/short equity funds from the Lipper TASS database and find that a small portion of these funds can outperform the market.

Financial Industry Affiliation and Hedge Fund Performance

2021 ◽  
Author(s):  
Lingling Zheng ◽  
Xuemin (Sterling) Yan
Keyword(s):  
Initial Public Offerings ◽  
Hedge Funds ◽  
Negative Impact ◽  
Hedge Fund ◽  
Seasoned Equity Offerings ◽  
Fund Performance ◽  
Financial Industry ◽  
Internal Conflicts ◽  
Industry Affiliation ◽  
Hedge Fund Performance

Affiliation with a financial conglomerate may provide hedge funds with superior information about the conglomerate’s lending, investment banking, and brokerage clients; such affiliation can also lead to potential conflicts with the other units of the conglomerate and exacerbate the conflict between hedge fund companies and hedge fund investors. We find that affiliated funds significantly underperform unaffiliated funds. A difference-in-difference analysis confirms the negative relation between financial industry affiliation and hedge fund performance. Affiliated funds pursue asset-gathering strategies, overweight their conducted initial public offerings/seasoned equity offerings clients’ stocks, are more likely to commit legal and regulatory violations, and tend to exhibit a greater number of internal conflicts. Our results are consistent with conflict of interest exerting a negative impact on the performance of affiliated hedge funds. However, it is possible that lack of skill also contributes to the underperformance of affiliated funds. This paper was accepted by Karl Diether, finance.

Style and Skill: Hedge Funds, Mutual Funds, and Momentum

2020 ◽  
Vol 66 (12) ◽  
pp. 5505-5531 ◽  
Author(s):  
Mark Grinblatt ◽  
Gergana Jostova ◽  
Lubomir Petrasek ◽  
Alexander Philipov
Keyword(s):  
Mutual Funds ◽  
Hedge Funds ◽  
Mutual Fund ◽  
Hedge Fund ◽  
Fund Performance ◽  
Short Sales ◽  
Fund Managers ◽  
Liquidity Provision ◽  
Stock Picking ◽  
Hedge Fund Performance

Classifying mandatory 13F stockholding filings by manager type reveals that hedge fund strategies are mostly contrarian, and mutual fund strategies are largely trend following. The only institutional performers—the two thirds of hedge fund managers that are contrarian—earn alpha of 2.4% per year. Contrarian hedge fund managers tend to trade profitably with all other manager types, especially when purchasing stocks from momentum-oriented hedge and mutual fund managers. Superior contrarian hedge fund performance exhibits persistence and stems from stock-picking ability rather than liquidity provision. Aggregate short sales further support these conclusions about the style and skill of various fund manager types. This paper was accepted by Tyler Shumway, finance.

scholarly journals Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

2019 ◽  
Vol 33 (10) ◽  
pp. 4771-4810 ◽  
Author(s):  
Clemens Sialm ◽  
Zheng Sun ◽  
Lu Zheng
Keyword(s):  
Market Segmentation ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Home Bias ◽  
Fund Performance ◽  
Superior Performance ◽  
Local Bias ◽  
Funds Of Hedge Funds ◽  
Hedge Fund Performance ◽  
Funds Of Funds

Abstract Our paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweigh their investments in hedge funds located in the same geographical areas and that funds with a stronger local bias exhibit superior performance. Local bias also gives rise to excess flow comovement and extreme return clustering within geographic areas. Overall, our results suggest that while funds of funds benefit from local advantages, their local bias also creates market segmentation that can destabilize the underlying hedge funds.

Can Liquidity Risk Explain Diseconomies of Scale in Hedge Funds?

2017 ◽  
Vol 07 (02) ◽  
pp. 1750002
Author(s):  
Hany A. Shawky ◽  
Ying Wang
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Liquidity Risk ◽  
Fund Performance ◽  
Diseconomies Of Scale ◽  
Liquidity Crises ◽  
Using Data ◽  
Asset Size ◽  
Hedge Fund Performance

Using data from the Lipper TASS hedge fund database over the period 1994–2012, we examine the role of liquidity risk in explaining the relation between asset size and hedge fund performance. While a significant negative size-performance relation exists for all hedge funds, once we stratify our sample by liquidity risk, we find that such a relationship only exists among funds with the highest liquidity risk. Liquidity risk is found to be another important source of diseconomies of scale in the hedge fund industry. Evidently, for high liquidity risk funds, large funds are less able to recover from the relatively more significant losses incurred during market-wide liquidity crises, resulting in lower performance for large funds relative to small funds.

scholarly journals The Effect of Investment Constraints on Hedge Fund Investor Returns

2018 ◽  
Vol 54 (4) ◽  
pp. 1539-1571 ◽  
Author(s):  
Juha Joenväärä ◽  
Robert Kosowski ◽  
Pekka Tolonen
Keyword(s):  
Real World ◽  
Hedge Funds ◽  
Liquidity Constraints ◽  
Hedge Fund ◽  
Fund Performance ◽  
Performance Persistence ◽  
Investor Returns ◽  
Fund Size ◽  
Hedge Fund Performance ◽  
Investment Constraints

This paper examines the effect of real-world, investor-level investment constraints, including several that have not been studied before, on hedge fund performance and its persistence. Using a large consolidated database, we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies. Hypothetical investor portfolios that incorporate additional minimum diversification constraints, minimum investment requirements, and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable, especially by large investors.

scholarly journals New Evidence On Hedge Fund Performance Measures

2011 ◽  
Vol 8 (11) ◽  
Author(s):  
Komlan Sedzro
Keyword(s):  
Data Envelopment Analysis ◽  
Performance Measures ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
Sharpe Ratio ◽  
Data Envelopment ◽  
Sharpe Ratios ◽  
Hedge Fund Performance ◽  
New Evidence

Hedge funds are still relatively unfamiliar to most investors despite the intense popularity they have enjoyed in recent years. Measuring the performance of these financial instruments using traditional methods is, however, problematic, since their returns do not follow a normal distribution. In this study, we consider rankings obtained with the Stochastic Dominance (SD) method and compare them with ranks produced using Sharpe Ratios, Modified Sharpe Ratios, and Data Envelopment Analysis. We also explore the advantages highlighted by the literature of the Data Envelopment Analysis (DEA) method in relation to traditional measures like Sharpe ratio and Modified Sharpe ratio. Our results show that classic performance measures are better correlated with SD than DEA results.

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