mutual fund performance an analysis of quarterly portfolio holdings this article employs the 1975 84 quarterly holdings of a sample of mutual funds to construct an estimate of their gross returns this sample which is not subject to survivorship bias is used in conjunction with a sample that contains the actual net returns of the mutual funds in addition to allowing the authors to estimate the bias in measured performance that is due to the survival requirement and to estimate total transaction costs the sample is used to test for the existence of abnormal performance the tests indicate that the risk adjusted gross returns of some funds were significantly positive copyright 1989 by the university of chicago

hedge funds the good the bad and the lucky we develop an estimation approach based on a modified expectation maximization em algorithm and a mixture of normal distributions associated with skill groups to assess performance in hedge funds by allowing luck to affect both skilled and unskilled funds we estimate the number of skill groups the fraction of funds from each group and the mean and variability of skill within each group for each individual fund we propose a performance measure combining the fund s estimated alpha with the cross sectional distribution of fund skill in out of sample tests an investment strategy using our performance measure outperforms those using estimated alpha and t statistic

hidden survivorship in hedge fund returns this study identifies a previously unreported bias in the tass database owing to a merger with the tremont database 60 percent of the funds added to the tass database between april 1999 and november 2001 are likely to be survivors i e funds that were selected only from funds that were live as of 31 march 1999 the resulting survivorship bias is substantial averaging more than 5 percent a year what would normally be termed the backfill period actually represents hidden survivorship a sorting algorithm to exclude these fund histories is proposed

too big to ignore hedge fund flows and bond yields abstract this paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields using a sample of 9725 hedge funds from 1994 to 2012 we find that fund flow is negatively related to the changes in 10 year treasury and moody s baa bond yields one month ahead this relation is still pronounced after controlling for other determinants of yield changes including the amount of arbitrage capital available in the economy suggesting a non trivial effect of flow induced hedge fund trading on bond yields flow impact on corporate bonds is further amplified during periods of decreasing market liquidity consistent with a fire sale hypothesis hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity treasury rate as well as between the tips and treasury bond yields suggesting that hedge funds exploit arbitrage opportunities in these fixed income markets

the effect of investment constraints on hedge fund investor returns this paper examines the effect of real world investor level investment constraints including several that have not been studied before on hedge fund performance and its persistence using a large consolidated database we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies hypothetical investor portfolios that incorporate additional minimum diversification constraints minimum investment requirements and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable especially by large investors

return smoothing liquidity costs and investor flows evidence from a separate account platform we use a new hedge fund data set from a separate account platform to examine 1 how much of hedge fund return smoothing is due to main fund specific factors such as managerial reporting discretion and 2 the costs of removing hedge fund share restrictions these accounts trade pari passu with matching hedge funds but feature third party reporting and permissive share restrictions we use these properties to estimate that 33 of reported smoothing is due to managerial reporting methods the platform s fund level liquidity is associated with a 1 7 performance reduction on an annual basis investor flows chase monthly past performance on the platform but not in the associated funds this paper was accepted by neng wang finance

bargaining with asymmetric information an empirical study of plea negotiations this paper empirically investigates how sentences to be assigned at trial impact plea bargaining the analysis is based on the model of bargaining with asymmetric information by bebchuk 1984 i provide conditions for the nonparametric identification of the model propose a consistent nonparametric estimator and implement it using data on criminal cases from north carolina employing the estimated model i evaluate how different sentencing reforms affect the outcome of criminal cases my results indicate that lower mandatory minimum sentences could greatly reduce the total amount of incarceration time assigned by the courts but may increase conviction rates in contrast the broader use of non incarceration sentences for less serious crimes reduces the number of incarceration convictions but has a very small effect over the total assigned incarceration time i also consider the effects of a ban on plea bargains depending on the case characteristics over 20 percent of the defendants who currently receive incarceration sentences would be acquitted if plea bargains were forbidden

survival look ahead bias and the persistence in hedge fund performance we analyze the performance persistence in hedge funds taking into account look ahead bias multi period sampling bias we model liquidation of hedge funds by analyzing how it depends upon historical performance next we use a weighting procedure that eliminates look ahead bias in measures for performance persistence in contrast to earlier results for mutual funds the impact of look ahead bias is exacerbated for hedge funds due to their greater level of total risk at the four quarter horizon look ahead bias can be as much as 3 8 depending upon the decile of the distribution we find positive persistence in hedge fund quarterly returns after correcting for investment style the empirical pattern at the annual level is also consistent with positive persistence but its statistical significance is weak

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

predicting hedge fund failure a comparison of risk measures this paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure when controlling for investment strategies performance fund age size lockup high water mark and leverage we find that funds with larger downside risk have a higher hazard rate how ever standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model further we find that liquidation does not necessarily mean failure in the hedge fund industry by reexamining the attrition rate we show that the real failure rate of 3 1 is lower than the attrition rate of 8 7 on an annual basis during the period of 1995 2004

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

hedge fund benchmarks information content and biases we discuss the information content and potential measurement biases in hedge fund benchmarks hedge fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases in addition broad based indexes mask the diversity of individual hedge fund return characteristics consequently these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds the approach to constructing hedge fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge fund performance is to observe the investment experience of hedge fund investors themselves the funds of hedge funds fofs in terms of measurement biases returns of fofs can deliver a cleaner estimate of the investment experience of hedge fund investors than the traditional approach in terms of risk characteristics indexes of fofs are more indicative of the demand side dynamics driven by hedge fund investors p

asset based style factors for hedge funds asset based style factors link returns of hedge fund strategies to observed market prices they provide explicit and unambiguous descriptions of hedge fund strategies that reveal the nature and quantity of risk asset based style factors are key inputs for portfolio construction and for benchmarking hedge fund performance on a risk adjusted basis we used previously developed models to construct asset based style factors and demonstrate that one model correctly predicted the return behavior of trend following strategies during out of sample periods in particular during stressful market conditions like those of september 2001

the statistics of sharpe ratios the building blocks of the sharpe ratio expected returns and volatilities are unknown quantities that must be estimated statistically and are therefore subject to estimation error this raises the natural question how accurately are sharpe ratios measured to address this question i derive explicit expressions for the statistical distribution of the sharpe ratio using standard asymptotic theory under several sets of assumptions for the return generating process independently and identically distributed returns stationary returns and with time aggregation i show that monthly sharpe ratios cannot be annualized by multiplying by 12 except under very special circumstances and i derive the correct method of conversion in the general case of stationary returns in an illustrative empirical example of mutual funds and hedge funds i find that the annual sharpe ratio for a hedge fund can be overstated by as much as 65 percent because of the presence of serial correlation in monthly returns and once this

only winners in tough times repeat hedge fund performance persistence over different market conditions we provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets specifically we construct two performance measures downsidereturns and upsidereturns conditioned on the level of overall hedge fund sector returns after adjusting for risks funds in the highest downsidereturns quintile outperform funds in the lowest quintile by about 7 in the subsequent year whereas funds with better upsidereturns do not outperform subsequently the downsidereturns can predict future fund performance over a horizon as long as 3 years for both winners and losers and for funds with few share restrictions

tournament behavior in hedge funds high water marks fund liquidation and managerial stake we analyze whether risk shifting by a hedge fund manager is related to the manager s incentive contract personal capital stake and the risk of fund closure we find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund s high water mark and when funds face little immediate risk of liquidation risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund overall high water mark provisions managerial stake and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

does growing wealth influence hedge funds development an empirical analysis abstractalternative investments such as hedge funds have in last years become an integral part of the investment portfolios of the wealthy the article s goal is also to answer the following research question does the global wealth of the world have impact on the global value of the hedge funds assets we also try to forecast the value of the hedge funds assets for the next years 2015 2017 the results from this study would also be valuable to investors and other stakeholders such as the regulators and the creditors of the hedge funds

do hedge funds deliver alpha a bayesian and bootstrap analysis abstract using a robust bootstrap procedure we find that top hedge fund performance cannot be explained by luck and hedge fund performance persists at annual horizons moreover we show that bayesian measures which help overcome the short sample problem inherent in hedge fund returns lead to superior performance predictability sorting on bayesian alphas relative to ols alphas yields a 5 5 per year increase in the alpha of the spread between the top and bottom hedge fund deciles our results are robust and relevant to investors as they are neither confined to small funds nor driven by incubation bias backfill bias or serial correlation

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

sentiment hedging how hedge funds adjust their exposure to market sentiment abstract we investigate a new facet of hedging ability among hedge fund managers using a sentiment exposure model we find evidence that fund managers adjust the market exposure of their portfolios to changes in market sentiment out of sample evidence indicates that hedge funds having the highest negative sentiment exposure outperform funds having the highest positive sentiment exposure by 1 7 2 4 per year the results remain persistent for both the sub period analysis and the analysis excluding crisis periods we also find that a hedge fund s willingness to take on sentiment exposure decreases with fund age and fund size and increases with incentive fees our findings remain robust even after controlling for hedge fund data biases as well as using alternative sentiment measures

staggering the optimal monetary rule and persistence abstract the purpose of this paper is to show that persistence is not an attribute that derives from the characteristics of wage and price setting alone the structure of demand the monetary rule and the welfare loss function are also crucial determinants of the time series characteristics of the model

the abcs of hedge funds alphas betas and costs the authors decomposed their estimated pre fee 1995 2009 hedge fund return of 11 13 percent into fees 3 43 percent an alpha 3 00 percent and a beta 4 70 percent the year by year results show that alphas were positive during every year of the past decade even during the recent financial crisis

a structural model of dynamic market timing this paper derives and analyzes dynamic timing strategies of a fund manager with private information endogenous timing strategies generated by various information structures and skills and associated fund styles are identified endogenous fund returns are characterized in the public information of an uninformed observer timing components are identified the paper provides foundations for regression analyses of fund returns and tests of market timing the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

volatility of aggregate volatility and hedge fund returns abstract this paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time we measure uncertainty via volatility of aggregate volatility vov and construct an investable version through returns on lookback straddles on the chicago board options exchange cboe volatility index vix we find that vov exposure is a significant determinant of hedge fund returns after controlling for fund characteristics we find a robust and significant negative risk premium for vov exposure in the cross section of hedge fund returns we corroborate our results using statistical and parameterized proxies of vov over a longer sample period

global hedge funds risk return and market timing we examined the performance of 115 global equity based hedge funds with reference to their target geographical markets in the seven year period 1994 2000 several results are noteworthy first global hedge fund managers do not show positive market timing ability but do demonstrate superior security selection ability the jensen s alphas we found before and after controlling for market timing are sizable and positive second incentive fees and leverage both have a significant positive impact on a hedge fund s risk adjusted return as demonstrated by sharpe ratios and jensen s alphas but not on a fund s selectivity index i e its performance after controlling for market timing effects third incentive fees can lower the hedge fund s up market and down market systematic risk fourth the size of a hedge fund is consistently related to its return performance finally contrary to the general perception leverage does not significantly affect the systematic risk of hedge funds