Do Hedge Fund Managers Display Skill?

ABSTRACT: We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information about their investment positions by implementing weaker internal controls. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

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Portraits of five hedge fund fraud cases

Journal of Financial Crime ◽

10.1108/13590790810866890 ◽

2008 ◽

Vol 15 (2) ◽

pp. 179-213 ◽

Cited By ~ 5

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.

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The market timing skills of Long/Short equity hedge fund managers

Research in Finance - Signs that Markets are Coming Back ◽

10.1108/s0196-3821_2014_0000030006 ◽

2014 ◽

pp. 23-51

Author(s):

Xin Li ◽

Hany A. Shawky

Keyword(s):

Market Timing ◽

Hedge Fund ◽

Fund Managers

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

Management Science ◽

10.1287/mnsc.2019.3433 ◽

2020 ◽

Vol 66 (12) ◽

pp. 5505-5531 ◽

Cited By ~ 2

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.

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Are hedge fund returns affected by media coverage of macroeconomic news?

Studies in Economics and Finance ◽

10.1108/sef-10-2017-0289 ◽

2019 ◽

Vol 36 (3) ◽

pp. 427-439

Author(s):

Sandip Dutta ◽

James Thorson

Keyword(s):

Hedge Funds ◽

Media Coverage ◽

Hedge Fund ◽

Real Sector ◽

Macroeconomic News ◽

Content Type ◽

Fund Managers ◽

News Announcements ◽

Hedge Fund Returns ◽

The Impact

Purpose Extant literature suggests that the difficulty associated with the interpretation of macroeconomic news announcements by the market in general in different economic environments, might be the reason why most studies do not find any significant relationship between real-sector macroeconomic variables and financial asset returns. This paper aims to use a different approach to measure macroeconomic news. The objective is to examine if a different measure of a macroeconomic news variable, constructed from media coverage of the same, significantly affects hedge fund returns. Design/methodology/approach The authors use a news index for unemployment, which is a real-sector variable, constructed from newspaper coverage of unemployment announcements and examine its impact on hedge fund returns. Findings Contrary to the other studies that examine the impact of macroeconomic news on hedge fund returns, the authors find that media coverage of unemployment news announcements significantly affects hedge fund returns. Practical implications Overall, this paper demonstrates that the manner in which the market interprets macroeconomic news announcements in different economic environments is probably a more relevant factor for hedge funds and is more likely to impact hedge fund returns. In conjunction with variables – constructed from media coverage of unemployment news announcements – that factor in the manner of interpretation, it is found that surprises also matter for hedge fund returns. This is an important consideration for hedge fund managers as well. Originality/value To the best of the authors’ knowledge, this is the first study that examines the impact of media coverage of macroeconomic news announcements on hedge fund returns and finds significantly different results with real-sector macro variables.

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