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Article
Publication date: 1 January 2004

Jedd Wider and Kevin Scanlan

On September 29, 2003, the staff (“Staff”) of the Division of Investment Management of the U.S. Securities and Exchange Commission (the “SEC”) issued a report to the SEC…

Abstract

On September 29, 2003, the staff (“Staff”) of the Division of Investment Management of the U.S. Securities and Exchange Commission (the “SEC”) issued a report to the SEC entitled the “Implications of the Growth of Hedge Funds” (the “Report”). The Report recommends amending Rule 203(b)(3)‐1 of the Advisers Act to require a hedge fund manager to “look through” each existing client and count each of the hedge fund’s underlying beneficial owners as a “client” of the hedge fund manager for the purpose of determining whether an investment adviser has 15 or more clients and therefore must register under the U.S. Investment Advisers Act of 1940. Such a registration requirement effectively would increase the minimum investment requirement for a hedge fund. The Report does not necessarily support the argument that subjecting hedge funds to periodic examinations by the SEC will help in early detection of fraud and prevention of resulting investor losses. Despite the Staff’s intentions to identify distinctions between customary hedge fund vehicles and other types of investment funds, no clear hedge fund definition or standard was provided in the Report. As a result, there is a danger that the scope of new hedge fund regulations will be too broad

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Journal of Investment Compliance, vol. 4 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 December 2003

Graham Phillips and Jerry Dawson

The growth of the use of hedge funds in both the USA and in Europe has led to greater attempts to regulate the market. The authors provide a guide to the way regulations…

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Abstract

The growth of the use of hedge funds in both the USA and in Europe has led to greater attempts to regulate the market. The authors provide a guide to the way regulations are likely to be imposed and the differences which may occur in the USA and European markets as a result.

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Balance Sheet, vol. 11 no. 4
Type: Research Article
ISSN: 0965-7967

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Article
Publication date: 1 January 2012

Nils S. Tuchschmid, Erik Wallerstein and Sassan Zaker

Hedge fund replication gained considerable attention during the period surrounding 2007 when it was anticipated to become for hedge fund investors what index funds are for…

Abstract

Purpose

Hedge fund replication gained considerable attention during the period surrounding 2007 when it was anticipated to become for hedge fund investors what index funds are for equity investors. The hedge fund replication concept only lacked a track record. This paper aims to present an updated evaluation.

Design/methodology/approach

Performance is evaluated on both a raw‐return basis and a risk‐adjusted basis using Fung and Hsieh's 8‐factor model. Particular emphasis is given to analyzing the performance of these products during the financial crisis and to highlighting the specific characteristics that distinguished them from their hedge fund cousins during this period.

Findings

The results show that the hedge fund replication space is definitely proving its existence as a credible hedge fund investment alternative. Talented hedge fund managers will always be in high demand, but they may have to just prove their high compensation a bit harder.

Research limitations/implications

Although this study is based on a short sample period, the results indicate that hedge fund replication products delivered returns that were at par with the returns of hedge funds. The replication products performed comparatively well during the crisis probably as a result of having less exposure to illiquid assets.

Originality/value

To the best of the authors' knowledge, this article uses the most extensive data set of 22 hedge fund replication products to analyze their performance.

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Managerial Finance, vol. 38 no. 1
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 26 April 2011

Kajal Lahiri, Hany A. Shawky and Yongchen Zhao

The main purpose of this chapter is to estimate a model for hedge fund returns that will endogenously generate failure probabilities using panel data where sample…

Abstract

The main purpose of this chapter is to estimate a model for hedge fund returns that will endogenously generate failure probabilities using panel data where sample attrition due to fund failures is a dominant feature. We use the Lipper (TASS) hedge fund database, which includes all live and defunct hedge funds over the period January 1994 through March 2009, to estimate failure probabilities for hedge funds. Our results show that hedge fund failure prediction can be substantially improved by accounting for selectivity bias caused by censoring in the sample. After controlling for failure risk, we find that capital flow, lockup period, redemption notice period, and fund age are significant factors in explaining hedge fund returns. We also show that for an average hedge fund, failure risk increases substantially with age. Surprisingly, a 5-year-old fund on average has only a 65% survival rate.

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Research in Finance
Type: Book
ISBN: 978-0-85724-541-0

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Book part
Publication date: 19 November 2012

Wafa Kammoun Masmoudi

Purpose – This research pinpoints the limitations of conventional models for evaluating the performance of hedge funds and attempts to provide a new framework for modeling…

Abstract

Purpose – This research pinpoints the limitations of conventional models for evaluating the performance of hedge funds and attempts to provide a new framework for modeling the dynamics of risk structures of hedge funds.

Methodology/approach – This chapter aims to explore how the systematic risk exposures of hedge funds vary over time and depend on exogenous variables that managers are supposed to use in their dynamic investment strategies. To achieve this, we used a Bayesian time-varying CAPM-based beta model within a state space technology.

Findings – The results showed that the volatility, term spread rate, and shocks in liquidity influence significantly on the time variation of hedge funds. Besides, the dynamics of beta indicates that the transmission channels of systematic risk are mainly the leverage levels of hedge funds and liquidity shocks.

Originality/value of chapter – These results are original because they help to explain how expected and unexpected hedge fund returns are correlated with the systematic risk factors via the beta dynamics.

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Recent Developments in Alternative Finance: Empirical Assessments and Economic Implications
Type: Book
ISBN: 978-1-78190-399-5

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Book part
Publication date: 31 December 2010

Wafa Kammoun Masmoudi

Purpose – The purpose of this chapter is to present an investigation on the dynamic linkages between global macro hedge funds and traditional financial assets of developed…

Abstract

Purpose – The purpose of this chapter is to present an investigation on the dynamic linkages between global macro hedge funds and traditional financial assets of developed and emerging markets.

Methodology/approach – To explore relationships among these price indices, we analyse Granger causality and vector autoregression (VAR) dynamics through impulse response functions. Besides, multivariate cointegration is used to know long-term relationships between assets and allows risk-averse investors to reduce uncertainty. Finally, a vector error correction model (VECM) provides active asset managers the opportunity to anticipate short-term price movements.

Findings – Our results show that in a Granger causality sense, we observe long- and short-term relationships between global macro hedge funds and traditional financial assets for Canada, France and Germany. This implies that opportunities for international portfolio diversification are significantly lower for countries having relationships between assets. For Canada, France and Germany, the risk-averse investors can reduce their long-term volatility by investing according to the cointegrating vector, whereas active managers can benefit from the knowledge of short-term asset price movements. The VEC Pairwise Granger causality in the short term confirms our analysis of causality according to VAR models.

Originality/value of paper – These results are original because they help the investor to understand the dynamics of the relationship between global macro hedge funds and traditional financial assets.

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Nonlinear Modeling of Economic and Financial Time-Series
Type: Book
ISBN: 978-0-85724-489-5

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Abstract

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The Savvy Investor's Guide to Building Wealth through Alternative Investments
Type: Book
ISBN: 978-1-80117-135-9

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Article
Publication date: 21 October 2013

Jan Fichtner

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

Abstract

Purpose

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

Design/methodology/approach

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

Findings

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.

Research limitations/implications

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.

Social implications

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.

Originality/value

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.

Details

critical perspectives on international business, vol. 9 no. 4
Type: Research Article
ISSN: 1742-2043

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Article
Publication date: 9 May 2008

Majed R. Muhtaseb and Chun Chun “Sylvia” Yang

The purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and…

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1671

Abstract

Purpose

The purpose of this paper is two fold: educate investors about hedge fund managers' activities prior to the fraud recognition by the authorities and to help investors and other stakeholders in the hedge fund industry identify red flags before fraud is actually committed.

Design/methodology/approach

The paper investigates fraud committed by the Bayou Funds, Beacon Hill Asset Management, Lancer Management Group (LMG), Lipper & Company and Maricopa investment fund. The fraud activities took place during 2000 and 2005.

Findings

The five cases alone cost the hedge fund investors more than $1.5 billion. Investors may have had a good opportunity for avoiding the irrecoverable costs of the fraud had they carefully vetted the backgrounds of the hedge fund managers and/or continuously monitored the funds activities, especially during turbulent market environments.

Originality/value

This is the first research paper to identify and extensively investigate fraud committed by hedge funds. In spite of the size of the hedge fund industry and relatively substantial level and inevitably recurring fraud, academic journals are to yet address this issue. The paper is of great value to hedge funds and their individual and institutional investors, asset managers, financial advisers and regulators.

Details

Journal of Financial Crime, vol. 15 no. 2
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 19 October 2012

Arman Eshraghi and Richard Taffler

This paper aims to help explain the rapid growth in aggregate hedge fund assets under management until June 2008 followed by their subsequent dramatic collapse in terms of…

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3587

Abstract

Purpose

This paper aims to help explain the rapid growth in aggregate hedge fund assets under management until June 2008 followed by their subsequent dramatic collapse in terms of the conflicting emotions such investment vehicles evoke, and, from this, to consider the implications of the excitement‐generating potential underlying all financial innovations.

Design/methodology/approach

Within the framework of critical discourse analysis, this paper explores how hedge funds were represented in the financial press, manager interviews, investor comments, and Congress hearings, before and after the burst of the hedge fund “bubble”. The authors then draw on the psychodynamic literature, and frame the human unconscious need for excitement in this discourse.

Findings

The paper finds evidence demonstrating how hedge funds were transformed in the minds of investors into objects of fascination and desire with their unconscious representation dominating their original investment purpose. Based on a psychoanalytic interpretation of financial markets, and dot.com mania in particular, the authors show how hedge fund investors' search for “phantastic objects” and the associated excitement of being invested in them can become dominant, resulting in risk being ignored.

Research limitations/implications

The authors take an interdisciplinary perspective drawing on the insights of the psychoanalytic understanding of unconscious fantasies, needs and drives as these relate to investment activity.

Practical implications

Public policy implications are that stricter ethical guidelines for the hedge fund industry need to be introduced, and suitability regulations that go beyond mandatory transparent disclosure of investment risks are required.

Originality/value

The paper is one of very few studies concerning investors' emotional attachment to financial innovations, and builds on the emerging field of emotional finance. The conclusions and implications discussed in the paper go beyond any single financial market or product.

Details

Accounting, Auditing & Accountability Journal, vol. 25 no. 8
Type: Research Article
ISSN: 0951-3574

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