Xiaoqing Eleanor Xu and Anthony L. Loviscek 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. This contrast in performance persists even after… Read more
Articles
DO FUNDS-OF-FUNDS DESERVE THEIR FEES-ON-FEES?
Andrew Ang, Matthew Rhodes-Kropf and Rui Zhao 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 publicly reported databases. Instead, the correct fund-of-funds… Read more
MEASURING THE RISK OF LARGE LOSSES
Kay Giesecke, Thorsten Schmidt and Stefan Weber Risk management is an important component of the investment process. It requires quantitative measures of risk that provide a metric for the comparison of financial positions. In this expository paper, we give an overview of risk measures. In particular, we contrast different risk measures with respect to their… Read more
THE PROFOUND EFFECTS OF AUTOMATION ON STOCK MARKETS AROUND THE WORLD
Pankaj K. Jain We document the profound impact of technology on the functioning of financial markets around the world. Specially, we report a strong trend towards fully automated trading systems. This trend is associated with a significant decline in the cost of equity capital. These findings are consistent with the notion that computerization enhances liquidity… Read more
A MODEL OF FUND GROWTH FOR MANAGED FUTURES: EVIDENCE OF MANAGERIAL SKILL
Paul Lajbcygier Fund size is an essential component of a fund’s overall value. In this work, we argue that growth in fund size results from managerial skill. To test this argument, we estimate a model that links fund growth to performance characteristics. We use the model to isolate significant performance characteristics and confirm that the… Read more
BAYES VS. RESAMPLING: A REMATCH
Campbell R. Harvey, John C. Liechty and Merrill W. Liechty We replay an investment game that compares the performance of a player using Bayesian methods for determining portfolio weights with a player that uses the Monte Carlo based resampling approach advocated in Michaud (Efficient Asset Management. Boston: Harvard Business School, 1998).Markowitz and Usmen (Journal of… Read more
WHY IS THERE A HOME BIAS? COUNT THE TEETH!
Jitka Hilliard and Jimmy E. Hilliard Under somewhat idealized conditions, investors would achieve the best risk return tradeoff by allocating equity investment in each country equal to its percentage share of world equity capitalization. But factual evidence confirms that domestic investors prefer domestic stocks. For example, domestic investors allocate about 90 percent of their portfolios… Read more
ESTIMATION ERROR AND PORTFOLIO OPTIMIZATION: A RESAMPLING SOLUTION
Richard Michaud and Robert Michaud Markowitz (1959) mean–variance (MV) portfolio optimization has been the practical standard for asset allocation and equity portfolio management for almost 50 years. However, it is known to be overly sensitive to estimation error in risk-return estimates and have poor out-of-sample performance characteristics. The Resampled Efficiency™ (RE) techniques presented in Michaud… Read more
BEYOND VALUE AT RISK: FORECASTING PORTFOLIO LOSS AT MULTIPLE HORIZONS
Lisa R. Goldberg, Guy Miller and Jared Weinstein 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 extreme value statistics. We take account of… Read more
FIRST COME FIRST DISSERVED
Joseph Cerniglia and Joshua Livnat This study investigates whether stock market reactions to earnings information of firms that release their earnings close to quarter-end (Early) are systematically different from their industry peers which report later during the quarter (Late). Unexpectedly, we find that immediate market reactions to early reporters are weaker than those to late… Read more