Ronnie Sadka Volume 10, Number 2, Second Quarter 2012 This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5%… Read more
Articles
Asset Allocation Dynamics in the Hedge Fund Industry
Li Cai and Bing Liang Volume 10, Number 2, Second Quarter 2012 This paper examines asset allocation dynamics of hedge funds through conducting optimal change point test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that more dynamic hedge funds exhibit significantly better quality… Read more
Liquidity Shocks and Hedge Fund Contagion
Nicole M. Boyson, Christof W. Stahel and René M. Stulz Volume 10, Number 2, Second Quarter 2012 In Boyson, Stahel, and Stulz (2010), we investigate whether hedge funds experience worst return contagion that is, correlations in extremely poor returns that are over and above those expected from economic fundamentals. We find strong evidence of contagion… Read more
Calibrating Neutrality: The Evolving Global Opportunity Set
Sharon Hill and Chris Gowlland Volume 10, Number 1, First Quarter 2012 Modern portfolio theory suggests that investors can achieve maximum diversification holding a portfolio of risky assets reflecting the entire market, but no generally accepted method exists to construct such a portfolio. We present data on global equities and global fixed-income securities since 1990… Read more
Timing the Value Style Index in a Markov Regime-Switching Model
Hany Guirguis, Ted Theodore and Michael Suen Volume 10, Number 1, First Quarter 2012 We construct and test a popular indicator for timing value style investment: the earnings yield dispersion (EYD). Conventional wisdom holds that one should invest in value style when there is a wide dispersion in earnings yield (E/P ratios) across the equity… Read more
Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis
Zvi Bodie, Jérôme Detemple and Marcel Rindisbacher Volume 10, Number 1, First Quarter 2012 This paper explores the optimal design of personal pensions based on the economic theory of the life cycle. It assumes that individuals derive utility from consumption of goods and leisure and that at some date they retire and stop earning income… Read more
Efficient Indexation: An Alternative to Cap-Weighted Indices
Noël Amenc, Felix Goltz, Lionel Martellini and Patrice Retkowsky Volume 9, Number 4, Fourth Quarter 2011 This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return trade-off. The index construction method goes back to the roots of modern portfolio theory and focuses on the… Read more
Managing the Volatility of Alpha Models
Tony Elavia and Migene Kim Volume 9, Number 4, Fourth Quarter 2011 After posting good performance for over two decades, quantitative equity investment managers have recently produced weak returns. We develop a measure of risk and show how changes in risk provide a common framework to explain factor returns and past underperformance. We find that… Read more
Pairs – Trading on Divergent Analyst Recommendations
Susana Yu Volume 9, Number 4, Fourth Quarter 2011 Pairs-trading is a short-term, self-financing arbitrage strategy in which buy and sell positions are simultaneously placed on two stocks whose prices have moved temporarily apart after following a long parallel path. We develop a new pairs-trading rule based on financial analysts’ buy/hold/sell recommendations from IBES Details… Read more
Another Look at Idiosyncratic Volatility and Expected Returns
Wei Huang, Qianqiu Liu, S. Ghon Rhee and Liang Zhang Volume 9, Number 4, Fourth Quarter 2011 We conduct comprehensive analyses of the return characteristics of stock portfolios sorted by idiosyncratic volatility. We show that the relationship between idiosyncratic volatility and expected stock returns depends on whether the portfolio is composed of stocks with extreme… Read more