Martin L. Leibowitz and Anthony Bova Active equity strategies that are highly benchmark-centric will generally have a minimal impact on fund-level volatility. Since most US institutional portfolios are overwhelmingly dominated by their equity exposure, any incremental tracking error will be submerged by the beta effect. Positive alpha opportunities from tightly beta-targeted strategies can therefore be… Read more
Articles
PERFORMANCE-BASED FEES AND RISK SHIFTING WITH KNOCKOUT BARRIER
Xiaodong Xu and Bernd Scherer Many investment firms reward portfolio managers based on their performance. This article investigates a manager’s optimal active risk policy using stochastic programming techniques. Our multiple-period model incorporates the most common incentive-fee structures, and captures the risk that the manager is fired for underperformance. In contrast to single-stage models, the manager… Read more
Will the Phillips Curve Cause WWIII?
A SIMPLE MODEL FOR THE EXPECTED PREMIUM FOR HEDGE FUND LOCKUPS
Emanuel Derman What excess return should a fund of funds expect to earn for investing in a hedge fund with an extended lockup? In this paper, we present a simple model for estimating the premium for long-term lockups. Because there is a demonstrated statistical persistence to the quality of hedge fund returns within a particular… Read more
HEDGE FUND MERGERS
Nusret Cakici and Sris Chatterjee This paper examines the characteristics of merged hedge-funds. The data indicate that merged hedge-funds are larger funds that have underperformed over a two-year period prior to merger and have suffered from significantly lower money-flow prior to merger. Merged hedge-funds are also older funds. The fee structure of merged funds is… Read more
CAN HEDGE-FUND RETURNS BE REPLICATED?: THE LINEAR CASE
Jasmina Hasanhodzic and Andrew W. Lo In contrast to traditional investments such as stocks and bonds, hedge-fund returns have more complex risk exposures that yield additional and complementary sources of risk premia. This raises the possibility of creating passive replicating portfolios or “clones” using liquid exchange-traded instruments that provide similar risk exposures at lower cost… Read more
TIMING ABILITY IN THE FOCUS MARKET OF HEDGE FUNDS
Yong Chen This paper examines the timing ability of hedge funds covering various investment categories. We extend the Treynor–Mazuy (1966) and Henriksson–Merton (1981) market timing models to a multiple market framework and propose the concept of a focus market in which a fund trades most actively. Concentrating on the focus market enables us to parsimoniously… Read more
WILL HEDGE FUNDS REGRESS TOWARDS INDEX-LIKE PRODUCTS?
William Fung and David A. Hsieh Hedge funds have grown substantially in the past few years even as hedge fund performance has declined with the rapid increase of capital. History tells us that over-priced, active managers will be replaced by low-cost, passive, index-like alternatives. Could the same process be taking place in the hedge fund… Read more
HOW HEDGE FUNDS BEAT THE MARKET
Craig French and Damian Ko This paper investigates the determinants of hedge fund portfolio performance—whether hedge funds exhibit security selection skill and market-timing skill. We examine a sample of 157 long-short equity hedge funds over the 10-year period from January, 1996 through December, 2005. To account for nonlinearities we employ the Treynor and Mazuy (1966)… Read more
PROXY VOTING BRAND COMPETITION
Mark Latham Institutional and individual investors can coordinate their proxy voting to improve corporate governance. A new funding design for professional proxy advisors can increase their quality and competition. These reforms would reduce the need for the public sector to police boards of directors by onerous regulation and expensive lawsuits… Read more