Hedge Fund Investment Research Articles

Loss-Driven Activism

Abstract I show that hedge funds react to unrealized losses on their passive positions by engaging with the management. The hedge fund managers’ psychological response is consistent with cognitive dissonance: They blame the firms’ management and switch to activism. The loss, which is hedge fund-investment specific, is distinct from economic factors such as the firm’s industry-adjusted performance. Loss-driven activism is more likely to be unfocused on specific issues and results in worse firm performance. This study shows that an overlooked consequence of unrealized losses is to trigger an active engagement with the firm.

ПЕРСПЕКТИВЫ СТРАТЕГИИ АКТИВНОГО ИНВЕСТИРОВАНИЯ НА ПРИМЕРЕ ХЕДЖ-ФОНДОВ

The article describes the current status of the hedge fund segment and their investment strategies using the analysis of financial statements, business models and the index method, when a group of hedge funds adhering to the same strategy are combined into an index. CAPM modeling, OLS and calculation of efficiency coefficients (including the Sharpe coefficient) were used. The results of the assessment allowed us to conclude that the most impactful in modern conditions is the global macro strategy of hedge funds investment. To evaluate future profitability within the framework of a given strategy, a model of dependence on market indices was developed.

Exploring Hedge Fund Strategies in Portfolio Management Using Financial Derivatives and Their Impact on Market Volatility

This paper aims to explore the strategies employed by hedge funds when using financial derivatives for portfolio management and their impact on market volatility. It begins with a discussion of the importance of hedge funds in the investment world, followed by an examination of the strategies they employ, including the use of financial derivatives such as futures, options and swaps. In addition, the influence of these strategies on market volatility is also analyzed. This study provides valuable insights on hedge fund investment strategies and their impact on the market and has important reference value for investors and hedge fund managers. Hedge fund has attracted more and more attention in the investment field. Its unique strategy and high return ability make it highly valued in the investment community. This article takes an in-depth look at the strategies employed by hedge funds when using financial derivatives for portfolio management and explores the impact of these strategies on market volatility.

How to Use Different Hedging Strategies to Make Your Company Profitable

The profitability of investors through arbitrage decisions is a topical issue in the economy, and some researchers have found that the study of corporate stocks bonds and markets has a significant impact on investors' hedging, however, there is a lack of uniform explanation of the operational methods and scope of influence behind it. Therefore, this article focuses on four different portfolios to further analyze the importance of market analysis for hedge fund investments. The methodology of this paper is to first select the hedging method we will use, then select two different companies based on various factors such as the recent market and the future trend of stocks and bonds, hedge these two companies on stocktrack, and accept the results after two weeks of hedging. In this paper, four sets of portfolios will be used to enhance the credibility of the article. The results of the study show that the direction of the stock and the general trend of the market are particularly important for investors to make hedging transactions, and that if arbitrage strategies are used arbitrarily without taking into account the actual situation there is a high risk of investment failure. Thus, it is necessary to choose the appropriate arbitrage strategy for hedging based on the future direction of the market and stocks.

Public pension fund investments into hedge funds during the Great Recession: a network analysis

State public employee retirement systems in the United States control over $5 trillion in assets, with large investments in alternative asset classes like hedge funds. This paper studies public pension fund investments into hedge funds in the period immediately surrounding the 2008 Financial Crisis and the Great Recession. Using micro-level investment data, the paper examines the characteristics of this network of investment flows and compares these networks to similar investments made by private pension funds. We find that there is considerable overlap among public pension funds in their choice of hedge fund investments. While the analysis is limited by data availability, the paper provides a novel study of actual investment decisions rather than aggregate portfolio outcomes.

Hedge Fund Investment in ETFs

Hedge Fund Investment in ETFs

How Fast Do Investors Learn? Asset Management Investors and Bayesian Learning

Abstract We study the speed with which investors learn about managers’ skills by examining how quickly investor and managers’ beliefs converge. After showing our measure proxies for the change in the dispersion of beliefs, we find that hedge fund investors learn as fast as suggested by Bayes’ rule. However, we find mutual fund investors learn more slowly than suggested by Bayes’ rule. Mutual fund investors’ slow learning is not due to the use of different performance measures, institutional frictions, or lack of sophistication, but could be due to a low payoff from learning. Our results indicate learning speed depends on financial participants’ incentives. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Practical Applications of Hedge Funds: Resolving Myths about ESG Integration

While environment, social, and governance (ESG) integration is widely accepted, hedge fund managers have integrated ESG factors into their investment process more slowly than other asset managers. Several myths and fallacies undermine hedge funds’ ESG conviction. In <b><i>Hedge Funds: Resolving Myths about ESG Integration</i></b>, from the Fall 2022 issue of <b><i>The Journal of Alternative Investments,</i> Dulari Pancholi</b> of <b>NEPC</b> discusses the myths and fallacies that undermine hedge funds’ ESG conviction and embraces a view of ESG investing that serves to debunk the myths. She seeks to encourage wider acceptance of ESG considerations in the process of managing hedge fund investments. She explains how including ESG factors in hedge fund strategies can positively impact the funds and their clients. A hedge fund manager may be able to increase the fund’s future risk-adjusted return, without necessarily giving the portfolio a social slant, by taking ESG factors into account early in the original underwriting process. Senior leadership must actively support firm-wide adoption while being strategic with the use of time and resources.

Importance Weights of Performance Ratios: Analyzing Hedge Funds by Entropy Method

In this study, it is aimed to examine the importance weights of performance ratios by using the data of hedge funds operating in the January 1999-May 2019 period. In the study information, Calmar, Jensens alpha, m-square, Sharpe, Sortino and Sterling ratios, which hedge fund investors expect to be high, were calculated, and the importance weights of these ratios were determined by the Entropy method, which is one of the multi-criteria decision-making methods. The results show that Sortino, Sterling, and Jensen’s alpha ratios have higher importance weights than other ratios.

Whither the Working-Class Journalist over Thirty?

Whither the Working-Class Journalist over Thirty?

Hedge Funds: Resolving Myths about ESG Integration

Despite the widespread acceptance of the ESG concept, its adoption by the hedge fund industry has been relatively slower than in other asset classes. A series of misconceptions and myths seems to hinder the conviction level in the hedge fund universe. This article examines the top misconceptions about ESG integration and hopefully clears a path for increased adoption in the hedge fund investment management process. It argues that ESG integration can be adopted in all hedge fund strategies and provides meaningful benefits to both hedge funds and their clients. By incorporating ESG considerations early in the initial underwriting process, a hedge fund manager can potentially improve the future risk-adjusted return for the fund without necessarily creating a social tilt in the portfolio. Importantly, senior leadership should champion its firm-wide adoption by being intentionally strategic about the time commitment and resource allocation.

Nonlinear hedge fund index clones?

Cloning hedge fund indexes circumvents the many challenges associated with direct hedge fund investment. Theoretically, hedge fund indexes could have nonlinear exposures to the economic risk factors that drive their returns and may require nonlinear clones. By using flexible statistical models, we enable the choice between linear and nonlinear clones. We demonstrate that for certain hedge fund styles, nonlinear index clones are crucial for high fidelity replication. Nonlinear clones both facilitate economic insights to cloning and enhance the best linear clones. JEL classification: G10, G23, C15

Investor protection, hedge fund leverage and valuation

Weak investor protection inevitably causes concentrated insider equity ownership, economic decision distortion and resource misallocation (Shleifer and Vishny, 1993). Our paper focuses on theoretical hedge fund valuation and dynamic leverage choice by incorporating the consideration of weak investor protection. The weak investor protection effect on dynamic leverage choice is ambiguous, as it depends on the managers’ moneyness ratio, which will certainly have a negative effect on the hedge fund investors’ payoff. Thus, managers should take more ownership and engage in short volatility strategies in weak investor protection to secure their total payoff.Weak investor protection also significantly increases the hedge fund founding break-even alpha.

Charlie Eaton. Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education. Chicago, IL: University of Chicago Press, 2022. 203p. Hardcover, $23.30 (ISBN: 978-0-226-72042-5).

Charlie Eaton has written a book exploring a topic many of us are aware of and probably appalled by—the insidious relationship between high finance and higher education. What Eaton has done, however, is put names to the connections and provided plenty of data to back up his assertions in Bankers in the Ivory Tower . This is a text that anyone connected to academia, including librarians, alumni, and the unfortunate group of debt-ridden nongraduates, can benefit from. In this well-documented book, where the data never becomes too intrusive, Eaton shines a light on people in high finance (private equity bankers and hedge fund investors) both emerging from and then influencing the Ivies and most selective universities. Their influence also extends to the for-profit university system (referred to as “the bottom”) and what Eaton calls “the middle” or the less-selective public universities. While the author’s conclusions are not as far-reaching as the situation demands, he makes an argument for collective action to combat widening socioeconomic inequality that disproportionately harms Black and brown folks.

Hedge Fund Investment in ETFs

Hedge Fund Investment in ETFs

Re-Evaluating Sharpe Ratio in Hedge Fund Performance in Light of Liquidity Risk

This paper demonstrates how the Sharpe Ratio can be modified by altering the measure of “total risk” in the denominator of the Sharpe Ratio (i.e., the standard deviation) to include liquidity risk, a major risk for investors in hedge funds that is missing from the standard Sharpe Ratio formulation. We refer to our liquidity-risk-adjusted performance ratio as the LRAPR. The results of our analysis of 1186 hedge funds alive in 2012-2020 show that funds with higher liquidity risk exhibit higher Sharpe Ratios and higher Alphas (as estimated in a 7-factor model that does not incorporate liquidity risk). We posit that analysts and investors should not necessarily take these higher Sharpe Ratios and higher Alphas as indications of fund superiority; what appears to be superior manager skill may rather be a compensation for bearing liquidity risk. Our LRAPR is a tool that analysts or investors could use to compare funds on a more equal footing, adjusting for differential liquidity risk across funds.

Do Hedge Fund Managers Understand Politics? Political Sensitivity and Investment Skill

We show that hedge fund managers who more actively and astutely adjust the political sensitivity of their portfolios, in line with the dynamic U.S. political landscape, improve their investment performance. Funds that tilt their portfolios toward market segments expected to perform better during the new political regime, specifically around U.S. Presidential elections, generate significantly higher alphas. Further, hedge fund families with greater responsiveness to political changes exhibit persistently superior performance and are more likely to survive. Hedge fund investors reward more responsive fund managers with greater inflows.

Structural Due Diligence, Operational Risks, and the Evaluation of Managed Account Platforms

The impact of the Great Financial Crisis on operational risk includes the birth of structural due diligence. Since the crisis, institutional investors have demanded more transparency and better governance in the hedge fund space. This demand has resulted in the growth of several different types of structures, including liquid alternatives via 40-ACT or UCITS funds, funds-of-one, managed accounts, and managed account platforms. Operational due diligence has extended beyond examining the noninvestment risks to include the best way structurally to access a specific hedge fund investment. The different structures have varying advantages and disadvantages, which translates to different types of operational risks. This article presents a matrix of the advantages and disadvantages of the structural forms and the concept of a structural alpha. The author examines managed account platforms (MAPs) and how to evaluate them.

Limitation on Trader Fund Losses under the CARES Act of 2020

Hedge funds are characterized by the significant complexity of their tax attributes. In this article, the authors explain how hedge fund investors might be affected by a <i>limitation on excess business losses</i> codified in a new IRC Section 461(l), introduced as a part of the TCJA of 2017 and later amended by the CARES Act of 2020. In order to allocate business losses, a hedge fund must be a trader fund. They thus discuss what makes a hedge fund a trader fund, whether management and performance fees of a trader fund are deductible as a trade or business loss, and whether trader fund losses constitute passive activity losses. After explaining the relationship between hedge fund losses and business losses, they illustrate with simple examples how the new provisions of the CARES Act under Section 461(l) may affect hedge fund investors. They find that compared to the TCJA some of these new provisions are beneficial while others are detrimental to investors. On balance, Section 461(l) remains punitive, uneconomical, and unnecessary. <b>Key Findings</b> ▪ Hedge funds that engage in frequent, substantial, and regular trading activity and intend to derive profit from short-term changes in security prices, rather than from interest, dividends, and long-term price appreciation, often make a determination that they are trader funds. However, trader fund losses might be subject to a limitation on excess business losses introduced by the TCJA. ▪ The CARES Act provided some much-needed clarifications of the excess business loss limitation introduced by the TCJA. On one hand, it excluded capital losses from the calculation of excess business loss, which is good news. On the other hand, it specifically disallowed using trade or business losses, including trader fund losses, to offset income from employment, which is bad news. ▪ Trade or business losses, including trader fund losses, can still offset employment income and income from investor activities up to a safe harbor amount. The CARES Act also clarified that excess business losses are carried over to future years when they can offset employment income and income from investor activities, this time without the excess business loss limitation.

Hedge Fund Alpha: What about Drawdowns?

The author reviews the relative risks of hedge fund investing using various commonly used measures, including market betas, correlations, and portfolio drawdowns. Historically, the data show that hedge funds have hedged a fair degree of systematic market risk, especially in the early years, offering meaningful diversification benefits to traditional stock/bond portfolios. However, the diversification benefits for investors in hedge funds have since declined, though they have not altogether been eliminated. Most recently, during the 2020 pandemic, modest drawdown benefits bore out for hedge fund investors, although again much less so than in the earlier years. <b>Key Findings</b> ▪ This article extends “Hedge Fund Alpha: Cycle or Sunset” (Sullivan 2021) with a focus on the relative risk of hedge funds versus a stock-only as well as more diversified portfolios that seek to blend hedge funds, stocks, and bonds. ▪ The hedging away of systematic risk by hedge funds appears to be diminishing in recent years, in part due to rising correlations between stocks and hedge funds, now approaching 90%. ▪ Drawdowns for various hedge fund composite portfolios during the turbulent periods of 2008 and 2020 have been more in line with those seen by a traditional 50/50 stock/bond portfolio. ▪ However, within the universe of hedge funds, some strategies have delivered more meaningful diversification benefits.