Hedge Fund Performance Research Articles

Disagreement exploitation and the cross‐section of hedge fund performance

Disagreement exploitation and the cross‐section of hedge fund performance

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 .

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.

Information interruption and hedge fund performance: Evidence from lockdown

This paper uses the COVID-19 outbreak as an exogenous shock to study the impact of information interruption on economic activities, particularly on hedge fund performance. Employing a difference-in-differences approach, we find that hedge funds preferring site visits experience a decline in performance and an increase in the failure risk during lockdowns. Additionally, we discover that physical interactions provide valuable soft information, irreplaceable by virtual communication. Our findings highlight the value of face-to-face interaction in information acquisition.

Performance and reporting predictability of hedge funds

AbstractThis paper proposes a predictive approach to forecast future hedge fund performances and reporting stops to a commercial database within a subsequent year. We found that gradient boosting of decision trees is well suited to make a prognosis about the future development and reporting stops of hedge funds. The derived models are trained and evaluated using a panel of 5,592 individual hedge funds. We rank the impact of 22 variables that are computed out of hedge fund reporting (micro variables) and three different market environments (macro variables) on the predictability of hedge fund performance. In this way, we show the economic reasonability of the computed models and demonstrate the superiority of statistical learning algorithms.

Managerial structure in the hedge fund industry

This paper provides the first study on how management structure influences hedge fund performance and risk. We document that hedge funds less tied to traditional assets often choose solo management structures. Solo-managed funds outperform team-managed funds, exhibit better skills in market return, volatility, and crisis timing, and demonstrate greater activity in beta management, but have higher idiosyncratic and tail risks. They are also less likely to be liquidated, with fund flows less performance sensitive. Using a sample of switched funds, we find that fund performance, assets, and risk correlate with the management structure switching decision.

A Bayesian learning model of hedge fund performance

A Bayesian learning model of hedge fund performance

Research on the Performance of Hedge Funds with Different Strategies in the 2008 Financial Crisis

The financial crisis of 2008 affected hedge funds of all types and with different strategies to varying degrees. In this article, I will examine the performance of five strategies during the crisis and the reasons for this. In 2008, managed futures strategies returned 19.31% because the futures market mainly deals with commodities, which are highly volatile and trendy, and managed futures strategies, which are mainly trend-based, are more likely to achieve excellent returns in this market. The macro strategy returned 3.34% because the strategy executors focused on the overall economic fundamentals and potential crises. Because the macro strategy has a global coverage of investments and multiple species, there are more options to hedge against risks when they arise. The long/short equity strategy returned -19.26%. The long/short equity strategy is predominantly long, with significant losses on long trades outweighing gains on short positions resulting in an overall negative return. The event-driven strategy returned -20.30%. Major corporate events often suffer from various resistance to proceed correctly in the case of a financial crisis. I hope my research will help investors allocate their investments appropriately according to the characteristics of different strategy funds.

Born after the Volcker Rule: Regulatory change, managerial remuneration and hedge fund performance

AbstractSubstantial remunerative benefits accrue to managers of new hedge funds launched after the implementation of the Volcker Rule if their previous employer is a large US bank. After the rule, ex‐bankers' funds charge higher management fees and receive more flows as compared with other new hedge funds established during the same period. This phenomenon is related to changes in investor perception of the distribution of skills of new fund managers rather than to the actual differences in skills. Ex‐bankers' funds are indistinguishable from other funds in terms of performance, risk, and liquidation probability, both before and after the Volcker Rule.

ESG investing in hedge funds: analysis of the impact of ESG criteria on investment decisions

Aim. To analyze the impact of adherence to ESG practices on investment performance and financial performance in hedge funds.Tasks. To study methods of ESG-criteria integration into hedge funds, their decision-making principles and influence of basic ESG-rating on the hedge funds performance; to analyze the dynamics of two selected hedge funds with different strategies on the basis of their assets and profitability levels; to formulate the recommendations for ESG-criteria use in the investment decision-making in hedge funds.Methods. The author of the article used a mixed method of analysis, combining qualitative and quantitative data, to form the empirical base of the study. The method of content analysis and empirical methods were used to analyze qualitative data. In turn, quantitative data were processed by statistical and logical tools. In addition, the author used methods of comparison and analysis of data on the profitability of selected hedge funds.Results. The funds BlackRock Sustainable Advantage World Equity Fund and BlackRock Systematic Global Long/Short Equity Fund, which have high and low ESG-rating respectively, were analyzed. The research showed that both funds are successful and perform well. However, the BlackRock Sustainable Advantage World Equity Fund has higher returns and performance. This can be attributed to the fact that this fund focuses on companies that perform well in sustainability and social responsibility. Moreover, the ESG fund has a high volume of assets and returns due to both sound investment policies and the development of government support for ESG companies, as well as external factors and the “low base effect.”Conclusions. Despite the fact that ESG funds are not a categorical anti-crisis measure, comparative analysis of funds with different ESG ratings revealed that ESG funds may show more stable results due to their more diversified portfolio strategy and consideration of ESG factors. Having studied the trends and dynamics of these hedge funds over several years, the author has come to the conclusion that the use of ESG-principles can give an advantage to investment companies in the market with a high degree of volatility. Additionally, a number of limitations of the study are highlighted.

Is research on hedge fund performance published selectively? A quantitative survey

AbstractWe examine whether estimates of hedge fund performance reported in prior empirical research are affected by publication bias. Using a sample of 1019 intercept terms from regressions of hedge fund returns on risk factors (the “alphas”) collected from 74 studies published between 2001 and 2021, we show that the selective publication of empirical results does not significantly contaminate inferences about hedge fund returns. Most of our monthly alpha estimates adjusted for the (small) bias fall within a relatively narrow range of 30–40 basis points, indicating positive abnormal returns of hedge funds: Hedge funds generate money for investors. Studies that explicitly control for potential biases in the underlying data (e.g., backfilling and survivorship biases) report lower but still positive alphas. Our results demonstrate that despite the prevalence of publication selection bias in many other research settings, publication may not be selective when there is no strong a priori theoretical prediction about the sign of the estimated coefficients.

Can Hedge Fund Returns Be Predicted?

After the 2008 financial crisis, hedge funds regained their popularity. Investors naturally wonder whether it is possible to predict and explain hedge fund returns just as its constituents. To answer this question, we examined hedge fund performance of 14 strategies from 2000 to 2017 by separating them into 3 groups. After deriving a statistical model, we applied it to the period of 2017-2022 and examined the errors. We observed that most strategies have a positive risk-adjusted rate of return and the current periods returns have a positive relationship with the previous periods. We concluded that monthly return has too much randomness while 3 strategies yearly returns in the middle quantile could be predicted. More historical return data can improve the accuracy of the model.

Hedge Fund Performance, Classification With Machine Learning, and Managerial Implications

Hedge Fund Performance, Classification With Machine Learning, and Managerial Implications

Do Agency Problems Predict the (Under-) Performance of Private Hedge Funds?

Do Agency Problems Predict the (Under-) Performance of Private Hedge Funds?

The Decline in Hedge Fund Performance Persistence

The Decline in Hedge Fund Performance Persistence

The Bounce-Back Effect: Checkmating Competitors with the Cold Hand

Purpose: The paper investigates the effect of winning performance streaks (the hot hand) and losing performance streaks (the cold hand) on future performance. Performance streaks have many implications in business settings, such as selecting stocks, hedge fund performance, employee performance, introducing new products, and business strategy. Design/methodology/approach: The paper empirically analyzes the effects of performance steaks. It uses data from world blitz chess championships. Findings: Contrary to some studies in competitive sports, the empirical analysis supports neither the hot hand nor the cold hand hypothesis. Instead, a new effect is discovered; performance increases following a loss. We term this effect to be the bounce-back effect. Research limitation/implications: Future research may conduct field experiments to investigate which business environments are likely to generate this effect. Similar to other studies on performance streaks, the analysis does not control for motivation. Future research may also analyze the role of motivation for performance. Originality/value: The paper identifies a new effect previously not investigated in the literature. In addition, the paper contributes to this literature by looking into competitive blitz chess, where psychological factors are more important than physiological factors. If the bounce-back effect holds more generally in other settings, it might have implications for predicting the performance of employees in competitive business environments.

Hedge fund performance persistence under different business cycles and stock market regimes

We examine different aspects of performance persistence of US hedge funds over different business cycles and stock market regimes. During periods of economic growth and bull stock markets, we report performance persistence for up to one year in the risk-adjusted returns of fund portfolios of different investment strategies, which is mainly driven by top fund performers. Performance persistence weakens dramatically during recession periods and bear stock markets. Our results are robust to different combinations of states of economic growth and stock market regimes. Trading strategies constructed on the basis of our results confirm the economic significance of our findings.

The Impact of Covid-19 on the Performance of Hedge Funds Compared to Mutual Funds in South Africa

Investors are constantly searching for methods to generate value above passive investment techniques. Therefore, analysing the performance of hedge funds as compared to mutual funds, particularly in the wake of Covid-19, can aid investors in their investment decision-making process. Those investors who desire above-average returns, particularly in volatile market conditions place an expectation on hedge funds to be able to achieve higher performance during economic downturns, given that they are designed to mitigate risk and to take advantage of harsh financial market conditions. Monthly, secondary data were collected from 30 September 2018 to 31 August 2021 to analyse and compare the risk-adjusted performance of five hedge funds and five mutual funds in South Africa. Both hedge and mutual funds indicated higher risk-adjusted returns from the pre-Covid-19 period compared to during the pandemic. Hedge funds were found to have higher risk-adjusted returns than mutual funds during the Covid-19 period. The novelty of these results indicated that hedge fund managers can achieve higher returns for investors during extreme market events.

Political risk, hedge fund strategies, and returns: Evidence from G7 countries

In this study, we examine the effects of political risk across a group of seven industrialised countries (G7) on hedge fund returns and further explore whether the effects of political risk on hedge fund returns vary according to hedge fund strategies employed by fund managers. Employing factor analysis to quantify political risk across the G7 countries, our results evince two interesting aspects. First, we find political risk to exert a negative and significant impact on hedge fund returns, suggesting that hedge fund performance tends to decrease as political risks across G7 nations increase. Second, the effects of political risk on hedge fund returns appear to vary with different hedge fund strategies employed by fund managers. Our results appear robust after employing three different analytical approaches and controlling a set of factors previously identified to affect hedge fund returns.

Stop-loss early termination clause and hedge fund performance

This paper is the first to empirically examine the incidence, determinants, and consequences of the stop-loss early termination clauses (SLCs) in the hedge fund industry. The SLCs force hedge funds to be terminated when their cumulative losses breach certain thresholds. We find 14% of hedge funds in China have SLCs. Fund management companies with higher previous performance and risks are more likely to establish funds with SLCs. And funds with SLCs generate higher future performance. Further, funds become more risk-averse when they approach to the termination thresholds, especially for large funds. We attribute the better performance of funds with SLCs to prompt terminations of bad performing funds.