Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao Volume 6, Number 4, Fourth Quarter 2008 Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in… Read more
Articles
Hedge Fund Due Diligence: A Source Of Alpha In A Hedge Fund Portfolio Strategy
Stephen J. Brown, Thomas L. Fraser and Bing Liang Volume 6, Number 4, Fourth Quarter 2008 Due diligence is an important source of alpha in a well designed hedge fund portfolio strategy. It is generally understood that the high returns possible in investing in hedge funds are somewhat offset by the relative lack of transparency… Read more
The Performances of MBS Hedge Funds and Mutual Funds: A Puzzle
Xiaoqing Eleanor Xu and Anthony L. Loviscek Volume 6, Number 4, Fourth Quarter 2008 MBS hedge funds have outperformed the Lehman MBS Index by an average of 210 basis points annually from 1992 through 2003. By comparison, MBS mutual funds have underperformed the Lehman MBS Index by an average of 141 basis points per year… Read more
Humpbacks in Credit Spreads
Deepak Agrawal and Jeffrey R. Bohn Volume 6, Number 3, Third Quarter 2008 Models of credit valuation generally predict a hump-shaped spread term structure for low quality issuers. This is understood to be driven by the shape of the underlying conditional default probabilities curve. We show that (a) recovery assumptions and (b) deviation of bond’s… Read more
A Structural Analysis of the Default Swap Market, Part 1 (Calibration)
Lisa R. Goldberg, Rajnish Kamat and Vijay Poduri Volume 6, Number 3, Third Quarter 2008 We analyze the default swap market with the two factor I2 structural model, which is driven by firm value and firm leverage. As we show empirically, the de- fault swap market incorporates these risks differentially over time, by region, by… Read more
The Structure of Hybrid Factor Models
Jose Menchero and Indrajit Mitra Volume 6, Number 3, Third Quarter 2008 We study the problem of augmenting fundamental risk models with statistical factors in order to capture the risk associated with omitted factors. The statistical factors are estimated by applying principal component analysis to the cross-sectional residuals. We show that in the limit of… Read more
Optimal Trading Strategy with Optimal Horizon
Edward E. Qian Volume 6, Number 3, Third Quarter 2008 Portfolio implementation is an essential part of active investment strategies. The trading horizon-the length of time allocated for trade implementation, is an important consideration in portfolio trading. Previous research on optimal trading limits the trading horizon as a fixed value. In this paper, we treat… Read more
Where Do Alphas Come From?: A New Measure of the Value of Active Investment Management
Andrew W. Lo Volume 6, Number 3, Third Quarter 2008 The value of active investment management is traditionally measured by alpha, beta, volatility, tracking error, and the Sharpe and information ratios. These are essentially static characteristics of the marginal distributions of returns at a single point in time, and do not incorporate dynamic aspects of… Read more
Beyond Value at Risk: Forecasting Portfolio Loss at Multiple Horizons
Lisa R. Goldberg, Guy Miller and Jared Weinstein Volume 6, Number 2, Second Quarter 2008 We develop a portfolio risk model that uses high-frequency data to forecast the loss surface, which is the set of loss distributions at future time horizons. Our model uses a fully automated, semi-parametric fitting procedure that has its basis in… Read more
How Does Investor Sentiment Affect the Cross-Section of Stock Returns?
Malcolm Baker, Johnathan Wang and Jeffrey Wurgler Volume 6, Number 2, Second Quarter 2008 Broad waves of investor sentiment should have larger impacts on securities that are more difficult to value and to arbitrage. Consistent with this intuition, we find that when an index of investor sentiment takes low values, small, young, high volatility, unprofitable… Read more