Robert C. Merton and Zvi Bodie This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and global practice in finance because its prescriptions… Read more
Articles
ASSET/LIABILITY MANAGEMENT AND ENTERPRISE RISK MANAGEMENT OF AN INSURER
Thomas S. Y. Ho Risk management techniques used in banks and trading floors are generally not applicable to insurance companies. Risk measures and risk monitoring approaches must be developed to respond to the challenges to the insurance industry. This paper describes the current risk management practices for both life and general insurance businesses, and proposes… Read more
SIFTING THROUGH THE WRECKAGE: LESSONS FROM RECENT HEDGE-FUND LIQUIDATIONS
Mila Getmansky, Andrew W. Lo and Shauna X. Mei We document the empirical properties of a sample of 1,765 funds in the TASS Hedge Fund database from 1977 to 2004 that are no longer active. The TASS sample shows that attrition rates differ significantly across investment styles, from a low of 5.2% per year on… Read more
THE DANGERS OF MECHANICAL INVESTMENT DECISION-MAKING: THE CASE OF HEDGE FUNDS
Harry M. Kat Over the last 20 years, investors have come to approach investment decision-making in an increasingly mechanical manner. Optimizers are filled up with historical return data and the “optimal” portfolio follows almost automatically. In this paper, we argue that such an approach can be extremely dangerous, especially when alternative investments such as hedge… Read more
ALTERNATIVE INVESTMENTS: CTAs, HEDGE FUNDS, AND FUNDS-OF-FUNDS
Bing Liang In this paper, we study alternative investment vehicles such as hedge funds, funds-of-funds, and commodity trading advisors (CTAs) by investigating their performance, risk, and fund characteristics. Considering them as three distinctive investment classes, we study them not only on a stand-alone basis but also on a portfolio basis. We find several interesting results… Read more
AIRAP—ALTERNATIVE RAPMs FOR ALTERNATIVE INVESTMENTS
Milind Sharma This paper highlights the inadequacies of traditional RAPMs (risk-adjusted performance measures) and proposes AIRAP (alternative investments risk-adjusted performance), based on Expected Utility theory, as a RAPM better suited to alternative investments. AIRAP is the implied certain return that a risk-averse investor would trade off for holding risky assets. AIRAP captures the full distribution… Read more
FEES ON FEES IN FUNDS OF FUNDS
Stephen J. Brown, William N. Goetzmann and Bing Liang Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund-specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive… Read more
EXTRACTING PORTABLE ALPHAS FROM EQUITY LONG/SHORT HEDGE FUNDS
William Fung and David A. Hsieh This paper shows empirically that Equity Long/Short (Equity L/S) hedge funds have significant alpha to both conventional as well as alternative (hedge fund-like) risk factors utilizing hedge fund data from three major data bases. Following the terminology introduced in Fung and Hsieh (2003) Journal of Fixed Income 58, 16–27… Read more
IN SEARCH OF A MODIGLIANI–MILLER ECONOMY
Kay Giesecke and Lisa R. Goldberg The Modigliani–Miller theorem describes conditions under which the value of a firm is independent of its leverage ratio. It is one of the cornerstones of finance. A history of this result along with a modern perspective on its derivation is given in Rubinstein (2003), Journal of Investment Management 1(2)… Read more
PREDICTABILITY OF LONG-TERM SPINOFF RETURNS
John J. McConnell and Alexei V. Ovtchinnikov Investment strategies of buying and holding recently spun off companies and their parentshave received significant attention from the investment community in the recent past. Despite their popularity, the existing evidence on the attractiveness of spinoffs appears piecemeal. In this paper, we examine in detail the stock price performance… Read more