Hedge Funds Research Articles

Hedge Fund Activism on Dual Edges: A Comprehensive Study

This comprehensive study explores hedge fund activism (HFA), its impact on corporate governance, and shareholder value. It outlines the operational mechanisms of HFA, including target selection, share acquisition, influence exertion, and pushing for change. The study also delves into HFA's aggressive investment strategies, contrasting them with traditional funds. It examines HFA's positive impacts, such as improved corporate governance and shareholder value, and negative consequences, like short-termism and increased market volatility. The paper further analyzes HFA through an ESG lens, highlighting its potential to disrupt CSR practices and affect employee health. Case studies of Yahoo and J.C. Penney illustrate both the successes and failures of HFA. The study concludes by suggesting areas for future research and action, emphasizing the need for a balanced approach to harness HFA's benefits while mitigating its risks.

Gender disparities among financial entrepreneurs: The case of hedge funds

ABSTRACT Hedge funds (HFs) operate as small and medium-sized enterprises and are managed by entrepreneurs. When it comes to gender, the HF industry is among the most unequal sectors. International associations tried to reduce this gap by creating entrepreneurial ecosystems tailored to women in finance. Such initiatives are ineffective if quality is not present. The market is quick to assess who will survive and who will not. If there is a gender gap, we must first assess whether it comes from differences in performance. Our results indicate that this is not the case, at least for equity HFs with global investment focus. Sociocultural factors are more likely the reason. Our findings should encourage women in finance to break sociocultural barriers and take on leadership responsibilities. Efforts should focus on encouraging women to join the finance industry at the earliest career stages. Efficient capital markets will then select the best managers, regardless of their gender.

The Color of Hedge Fund Activism

The Color of Hedge Fund Activism

Hedge fund activism and corporate litigation: an analysis of securities and non-securities lawsuits

PurposeThis study examines how corporate litigation, both securities-related and not, is affected by hedge fund (HF) activism.Design/methodology/approachWe use a difference-in-differences (DiD) method, along with propensity score matching and firm fixed effects and a comparison of HF and non-HF activists for identification.FindingsWe find that companies that are targeted by HFs face operation-related lawsuits, mainly from stakeholders or competitors. This effect does not seem to be caused by targets' higher tendency to settle the cases. Our evidence shows that HF activists increase firm value for the target firms that are prone to litigation.Originality/valueTherefore, our evidence supports the idea that the higher operation litigation risks are unintended consequences of improving firm efficiency through cost savings or restructuring of target firms by the activists.

Funding Illiquidity Implied by S&P 500 Derivatives

Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors.

Hedge funds network and stock price crash risk

Utilizing a dataset from 2013 to 2022 on China’s listed companies, we explored whether a hedge fund network could help explain the occurrence of Chinese stock crash. First, this study constructs a hedge fund network based on common holdings. Then, from the perspective of network centrality, we explore the impact of hedge fund network on stock crash risk and its mechanisms. Our findings suggest that companies with greater network centrality experience lower stock crash risk. Such results remain valid after alternating measures, using the propensity score matching method, and excluding other network effects. We further document that the centrality of hedge fund network reduces crash risk through two channels: information asymmetry and governance monitoring. In addition, the negative impact of hedge fund network centrality on stock crash risk is more pronounced for non-SOEs firms. In summary, our research shed light on the important role of hedge fund information network in curbing stock crash.

Who is smarter? Evidence from extreme financial risk contagion in hedge funds and mutual funds

We investigate the extreme risk contagion of hedge funds and mutual funds, thereby comparing their performance, and studying whether hedge funds are smarter than mutual funds or vice versa. We construct the Copula-CoVaR model to measure the dynamic and nonlinear extreme risk contagion of hedge funds and mutual funds from January 1994 to April 2020. Our findings suggest that compared with mutual funds, hedge funds are subject to lower extreme risk contagion and offer higher average returns. This outperformance is robust in different crisis periods. Moreover, although almost all types of hedge funds outperform mutual funds, the characteristics of hedge funds have a different impact on the outperformance. Specifically, hedge funds adopting strategies of long/short equity hedge, event-driven, funds of funds, emerging markets, equity market neutral, multi-strategy, and global macro, funds with moderate activism, and illiquid hedge funds are smarter than mutual funds from the perspective of extreme risk contagion.

Do buy-side analysts in earnings conference calls manipulate stock prices?

We investigate the generalizability of widely perceived notions that buy-side analysts try to influence or manipulate a firm’s stock price by praising or criticizing management during a public earnings conference call. Despite two institutional factors that make it difficult to detect empirically, we find some evidence of stock influence behavior by using a combination of data on conference call transcripts and trading by the institutions that employ the buy-side analysts. However, we also find evidence consistent with the null hypothesis that buy-side analysts are acquiring information rather than manipulating the stock price. Subsample analyses suggest that stock influence is more detectable among hedge funds, while information acquisition is the norm among traditional buy-and-hold institutions. The evidence we provide on each behavior should be of interest to firm managers who host conference calls, market participants who use conference calls to collect company information, as well as regulators who monitor for possible market manipulation.

Disagreement exploitation and the cross‐section of hedge fund performance

Disagreement exploitation and the cross‐section of hedge fund performance

Passthrough Entity Tax Scandal

Three dozen states have enacted laws since 2018 that are designed to provide passthrough entity owners with an unlimited federal tax deduction for state and local business income taxes. These “passthrough entity tax” regimes respond to the December 2017 federal tax law, which imposed a $10,000 cap on the state and local tax deduction. The new state laws generally allow passthrough entities to opt into paying an entity-level state income tax in exchange for a dollar-for-dollar benefit on their owners’ state personal income tax returns. The optional tax has proven to be immensely popular among passthrough entity owners across the country. But there is a problem with the passthrough entity tax concept: under the plain text of the Internal Revenue Code, the workaround does not work. The December 2017 law clearly precludes passthrough entities and their owners from deducting state and local income taxes beyond the $10,000-per-individual cap. And the legislative history of the December 2017 law—read in context—aligns with the statutory text. Surprisingly, the IRS has chosen to permit passthrough entity owners to utilize the workaround anyway. The IRS has not provided a plausible legal rationale for its position, but no one has standing to challenge the IRS’s position in court. Meanwhile, the IRS’s decision to allow the workaround is likely to cost the federal government more than $50 billion by the end of 2025, with most of the federal tax benefits flowing to passthrough owners with incomes of $1 million or more. In effect, the IRS has created a special tax preference—unauthorized by Congress—for hedge fund managers, law firm partners and other passthrough entity owners. And the Biden administration, notwithstanding its professed commitment to tax fairness, has acquiesced in this massive giveaway to the rich. The Biden administration and the IRS should reverse course immediately and apply the $10,000 state and local tax deduction cap to passthrough entity owners. As long as they permit passthrough entity owners to take advantage of the workaround, the Biden administration and the IRS will be abdicating their duty to enforce the law.

The Impact of CEOs’ Social Evaluations on Hedge Fund Activism

The Impact of CEOs’ Social Evaluations on Hedge Fund Activism

Hedge funds and the positive idiosyncratic volatility effect

Abstract While it is established that idiosyncratic volatility is negatively priced in the cross-section of stock returns, the relation between idiosyncratic volatility and hedge fund returns is largely unexplored. We document that hedge funds with high idiosyncratic volatility earn higher future risk-adjusted returns of 6 percent p.a. than hedge funds with low idiosyncratic volatility. The outperformance arises because hedge funds trade high idiosyncratic volatility stocks wisely. They pick high volatility stocks when they are underpriced and short-sell high volatility stocks when they are overpriced. Our results support the notion that hedge funds’ idiosyncratic volatility is a measure of managerial skill.

Skin or Skim? Inside Investment and Hedge Fund Performance

Hedge fund managers contribute substantial personal capital, or “skin in the game,” into their funds. Although these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect outside investors. We find that funds with more inside investment outperform other funds within the same family. This relationship is driven by managerial decisions to invest their own capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that insider capital may work as a rent-extraction mechanism at the expense of fund participation of outside investors. This paper was accepted by Gustavo Manso, finance. Funding: This work was supported by Columbia University and the Leonard N. Stern School of Business, New York University. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.4984 .

The invisible leverage of the rich. Absentee debtors and their hedge funds

The existing literature on finance, debt, and inequality depicts economic elites as a creditor class. According to a popular thesis, over the past four decades, the rich and ultra-rich households have experienced a saving glut (excess income), which they have invested in the debts of the poor and their governments. While it is undeniable that the rich have expanded their income share at the expenses of the poor, to refer to them as ‘creditors’ or ‘lenders’ is a misrepresentation of how they actually expand their wealth and income shares by financial means. For it conceals the fact that a great deal of their investments is leveraged, that is, carried out with borrowed money. This article shows that the debts generated for the sake of affluent households easily surpass those of all other households. However, these debts are not accounted for in statistics on household debt. This is because affluent households, particularly multi-millionaires and billionaires inside the top 1%, do not simply borrow from banks, like normal households do, but they are instead absentee debtors who borrow through corporate structures of which they are dominant shareholders and ultimate beneficiaries. To gain an insight into their invisible leverage, the article looks at how much hedge funds borrow and why their leverage matters.

The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol

We develop several innovations to bring the best practices of traditional investment funds to the blockchain landscape. Specifically, we illustrate how: (1) fund prices can be updated regularly like mutual funds; (2) performance fees can be charged like hedge funds; (3) mutually hedged blockchain investment funds can operate with investor protection schemes, such as high water marks; and (4) measures to offset trading related slippage costs when redemptions happen. Using our concepts – and blockchain technology – traditional funds can calculate performance fees in a simplified manner and alleviate several operational issues. Blockchain can solve many problems for traditional finance, while tried and tested wealth management techniques can benefit decentralization, speeding its adoption. We provide detailed steps – including mathematical formulations and instructive pointers – to implement these ideas and discuss how our designs overcome several blockchain bottlenecks, making smart contracts smarter. We provide numerical illustrations of several scenarios related to our mechanisms.

GME's Short Squeez and Market Regulation

GME Century Forbidding War is an event in which American retail investors force to force hedge funds. Based on the analysis of GME Century Forbidding War, this case analyzes the market supervision issues reflected behind this century war, and then explores the roles that enterprises, governments and individuals should play in the current financial market, thus further improving the financial market. Finally, it summarizes the inspiration of GME century's forced air war.

Unobserved Performance of Hedge Funds

ABSTRACTWe investigate hedge fund firms’ unobserved performance (UP), measured as the risk‐adjusted return difference between a firm's reported gross return and its portfolio return inferred from its disclosed long‐equity holdings. Firms with high UP outperform those with low UP by 6.36% per annum on a risk‐adjusted basis. UP is negatively associated with a firm's trading costs and positively associated with intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. We show that limited investor attention can delay investors’ response to UP and lead to longer lived predictability of fund firm performance.

Geopolitical risk hedging or timing: Evidence from hedge fund strategies

An increasing number of investors are concerned about how they can diversify risks and profits amid surging geopolitical uncertainties. Using a geopolitical risk timing/hedging model, we investigate whether hedge fund managers can effectively hedge or time geopolitical risks by adopting different trading strategies. We find that excluding those in the global macro category, hedge funds with higher minimum investments and management fees exhibit greater success in hedging geopolitical risks. Meanwhile, global macro hedge funds, which have longer lockup periods, are more adept at timing geopolitical risks by increasing their market exposures. Furthermore, hedge funds which are the top geopolitical risk hedgers and timers demonstrate higher economic value than those in the bottom group over the subsequent one and three months. Our findings provide valuable insights into private investors’ selection of hedge funds during periods of heightened geopolitical risk.

Hedge fund activism, R&D efficiency and firm value

We investigate the effectiveness of hedge fund activism in addressing inefficient R&D investment and creating long-term value at target firms. Using an endogenous growth model to estimate efficient R&D investment levels, we find target firms exhibit a tendency to overinvest in R&D. The likelihood of being targeted and activism announcement returns increase with R&D overinvestment. Despite observable cuts in R&D expenditure following activism, our analysis shows no significant improvement in R&D efficiency over the subsequent three years. Additional tests, controlling for the activist’s objectives, reputation, and stock selection ability, reveal a negative impact of activism on value creation. Our study offers important insights into how hedge fund activism shapes corporate R&D strategies and highlights challenges in achieving sustainable innovation and value enhancement through activist interventions.

DATA WAREHOUSING IMPLEMENTATION IN HEDGE FUND ADMINISTRATION INDUSTRY

This research work tried to provide an outline specification for scope of implementation of data warehousing. This model is targeting industry as a whole and covering general system and data sets which are minimally required by each and every hedge fund administrator, however based on geographical location and changes in regulatory conditions, macroeconomic environment across the globe and software, networking and hardware technical advancements and security led to open doors for further study and research according changes in trends and scope as we discussed. Few areas identified can be classified as: Technical Scope, Financial and budgetary changes, Changes in regulatory process, Change in macroeconomic environments, Changes in accounting terms, Information Security. KEYWORDS: Data Warehousing, Hedge Funds, Extraction, Administration, Trading