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The purpose of this paper is to examine in which ways hedge funds contribute to financialization.

Two already identified conduits through which financialization operates are applied to hedge funds.

The paper finds that hedge funds drive the phenomenon of financialization in two major ways, i.e. the financialization of corporations, and the financialization of markets. Hence, hedge funds can be conceived as agents of change for financialization.

There are indications that hedge funds possess disciplinary power. Future research should address this pivotal point, even though such power will be difficult to prove empirically.

Hedge funds have been found to potentially increase market volatility. In times of crisis, stricter regulation of these investors that take excessive risks seems prudent.

Through linking “hedge funds” with “financialization” this paper closes a research gap. In addition, the so far rather structural debate about financialization benefits from the actor-centered approach of this paper.

This is the third and final installment introducing fundamental concepts to those convergence market participants who are less familiar with financial markets, instruments, and conventions. This installment focuses on foreign exchange and commodity markets.

The purpose of this paper is to shed light on the changing pattern and characteristics of international financial flows in the emerging entrepreneurial ecosystems of Sub-Saharan Africa (SSA), provide a novel taxonomy to classify and analyze them, and discuss how such investments contribute to competence building and sustainable development.

In an exploratory study, the authors analyze the characteristics of international venture capital investors and the start-ups receiving funding in Kenya and map their interaction. The authors proceed by developing a novel taxonomy, classifying investors according to their main rationales (for-profit-for-impact), and start-ups according to the locus of needs and markets addressed by the start-up (local-global) and the locus of the start-ups capacity and knowledge (local-global).

The authors observe a new type of mainly western investors who support innovative ideas in SSA by identifying and investing in domestically developed technical innovations with the potential to address global market needs. The authors find such innovations to be mainly developed at the intersect of global and local knowledge.

The authors shed light on the – up to now – under-researched emerging phenomenon of international high-tech investments in SSA, and develop a novel taxonomy of technology investments in low-income countries, guiding further research on the conditions, impact, practical, and policy implications of this new form of finance flows.

The author suggests an empirical model to analyze the investment style of individual hedge funds and fund of funds. This approach is based on a mixture of the style analysis approach suggested by Sharpe [1988], the factor push approach used in stress testing, and historical simulation. The parameter estimates from this model are inputs in the Value‐at‐Risk analysis for a sample of 2,934 funds over the 1994–2000 period. The in‐sample and out‐of‐sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.

Academic research has shown that diversification today may not only include stocks and bonds but also alternative investments like hedge funds. However, practical and effective methods to identify the hedge fund styles that really enhance the risk return characteristics of a traditional portfolio as well as optimal allocation sizes are not available. The aim of the paper is to try to close this gap by proposing a portfolio optimization approach based upon the traditional market exposures of the different hedge fund strategies.

For this purpose, the paper first measures the bull and bear market betas of the main hedge fund strategies (equity market neutral, event driven, global macro, relative value, and managed futures). Based on the strategy characteristics, the authors then develop a systematic framework that calculates what percentage of each basic asset should be substituted for by hedge fund strategies to achieve the maximum results. The paper uses hedge fund index data from Hedge Fund Research and Barclay Hedge for the January 1999‐April 2011 sample period.

The empirical results show that this approach leads to an improvement in the annualized return of the optimized portfolio.

The paper adds to the existing literature by showing that it is possible to substitute traditional assets with hedge fund indices based on their exposures (beta) in varying market environments as a way to optimize the overall portfolio.

This study presents an investigation of the long and short‐term co‐movements between different hedge fund strategy indices and the stock markets of France, Germany, Japan, North America and the UK. To analyse relationships among these price indices, the EngleGranger methodology, based on bivariate testing for cointegration, and correlation analysis are conducted. The question of long‐term dependence instead of short‐term consideration is of particular interest, because portfolio optimization is based upon the cointegration of prices, rather than the correlation of returns. However, as is generally known, there is an information loss when returns are used instead of prices. Results indicate that there exists no station ary, long‐term relationship between the two as set groups. The overall suggestion is that opportunities exist to diversify an international portfolio by taking hedge funds into account. Moreover, this applies not only in terms of a limited time period, but also in the long‐run. Besides this main result, the augmented Dickey‐Fuller test statistics for cointegration residuals show quite different behaviour in comparison to the correlation co efficients. The values of the test statistics show that there seems to be a weaker tendency towards long‐term interrelation between hedge fund strategies and the US stock market. This applies even though average correlation co efficients among these assets exceed those of other combinations between stock and hedge fund indices.

The purpose of this paper is to examine the possibility of creating hedge funds “clones” using liquid exchange traded instruments.

Authors analyze the performance of fixed weight and extended Kalman filter generated clone portfolios (EKF) for 14 hedge fund strategies from February 2004 to September 2009. EKF approach does not indeed impose any normality constraints on the error terms which allow the filter to find the optimal recursive process by itself. Such models could adjust even faster to sudden shifts in market conditions vs a standard Kalman filter.

For five strategies out of 14, this work finds that EKF clones outperform their corresponding indices. Thus, for certain strategies, the possibility of cloning hedge fund returns is indeed real. Results should be however considered with caution.

This paper suggests that the most important benefits of clones are to serve as benchmarks and to help investors to better understand the various risk factors that impact hedge fund returns.

Rather than using fixed‐weight and rolling windows approaches (as Hasanhodzic and Lo), this work considers an extended version of the Kalman filter, a computational algorithm that better captures the time changing dynamics of hedge fund returns. Also, in order to be practical, this research considers investable factors and that the models themselves could not be constant over time.

The purpose of this paper is to examine the ability of hedge funds and funds of hedge funds to generate absolute returns using fund level data.

The absolute return profiles are identified using properties of the empirical distributions of fund returns. The authors use both Bayesian multinomial probit and frequentist multinomial logit regressions to examine the relationship between the return profiles and fund characteristics.

Some evidence is found that only some hedge funds strategies, but not all of them, demonstrate higher tendency to produce absolute returns. Also identified are some investment provisions and fund characteristics that can influence the chance of generating absolute returns. Finally, no evidence was found for performance persistence in terms of absolute returns for hedge funds but some limited evidence for funds of funds.

This paper is the first attempt to examine the hedge fund return profiles based on the notion of absolute return in great details. Investors and managers of funds of funds can utilize the identification method in this paper to evaluate the performance of their interested hedge funds from a new angle.

Using the properties of the empirical distribution of the hedge fund returns to classify them into different absolute return profiles is the unique contribution of this paper. The application of the multinomial probit and multinomial logit models in the fund performance and fund characteristics literature is also new since the dependent variable in the authors' regressions is multinomial.

The purpose of this study is to show that despite the profound and commendable efforts of the SEC staff and many others in the legal system, aimed at combatting a billion-dollar hedge fund manager fraud, the perpetrators were effectively not held accountable for the unlawful conduct and hence did not bear the consequences of the conduct. This case highlights the presence of a significant risk that hedge fund investors are not fully accounting for and very likely not earning a commensurate premium for it. During the 1999–2002 period, Lauer and Associates inflated hedge funds’ valuations, misrepresented the holdings of the funds, shared fake portfolios with investors, did not provide reasonable basis for the excessive valuations of the investee companies and manipulated their security prices. In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates received light sentences. Yet investors were around US$1.0bn which were never recovered or compensated.

The study applies clinical case analysis. The study produced detailed research and analysis of the of the US based Lancer Management Group fraud case. The focus is on the consequences to investors and other stakeholders in the hedge fund industry.

In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates receive light sentences. Yet investors were around US$1.0bn. Investors’ losses were never recovered or compensated.

This is a clinical case study. It is not an empirical study. Findings should be carefully construed.

This study directs hedge fund investors and industry stakeholder to the real possibility of not fraud but also to the limited efficacy of the system in terms of providing protection and compensation to investors. Investors and stakeholders must pay close attention in the due diligence process to minimize probability of fraud.

Hedge fund industry fraud leads to devastating consequences to investors and obviously to their wealth and very possibly adversely impact local economy and community.

This study presents many events that show the extent of the fraud and how it was conducted. This paper shows despite the extensive effort of the regulatory and judicial system, the perpetrators of the fraud were not held accountable for their actions. This case does not point toward a macro system failure. It highlights the presence of a real risk that investors are not accounting for and very likely not earning a commensurate reward for it.

The purpose of this paper is to gain a better understanding of the market timing skills displayed by hedge fund managers during the 2007‐08 financial crisis.

The performance of a market timer can be measured through the 1966 Treynor and Mazuy model, provided the regression alpha is properly adjusted by using the cost of an option‐based replicating portfolio, as shown by Hübner. The paper adapts this approach to the case of multi‐factor models with positive, negative or neutral betas. This new approach is applied on a sample of hedge funds whose managers are likely to exhibit market timing skills. This concentrates on funds that post weekly returns, and analyzes three hedge funds strategies in particular: long‐short equity, managed futures, and funds of hedge funds. The paper analyzes a particular period during which the managers of these funds are likely to magnify their presumed skills, namely around the financial and banking crisis of 2008.

Some funds adopt a positive convexity as a response to the US market index, while others have a concave sensitivity to the returns of an emerging market index. Thus, the paper identifies “positive”, “mixed” and “negative” market timers. A number of signs indicate that only positive market timers manage to acquire options below their cost, and deliver economic significant performance, even in the midst of the financial crisis. Negative market timers, by contrast, behave as if they were forced to sell options without getting the associated premium. This behaviour is interpreted as a possible result of re sales, leading them to liquidate positions under the pressure of redemption orders, and inducing negative performance adjusted for market timing.

The paper suggests that the convexity in returns that is generally associated with market timing can be attributed to three sources: timing skills, exposure to nonlinear risk factors, or liquidity pressures. It manages to identify the impact of the latter two effects in the context of hedge funds.