Search results
1 – 10 of over 39000This study examines several aspects of active portfolio management by equity hedge funds between 1996 and 2013. Consistent with the idea that cross-sectional return dispersion is…
Abstract
This study examines several aspects of active portfolio management by equity hedge funds between 1996 and 2013. Consistent with the idea that cross-sectional return dispersion is a proxy for the market’s available alpha, our results show that equity hedge funds achieve their strongest performance during periods of elevated dispersion. The performance advantage is robust to numerous risk adjustments. Portfolio managers may use the current month’s dispersion to plan the extent to which the following month’s investment approach will be active or passive. We also estimate the active share for equity hedge funds and find an average of 53%. We further document the average annual expense ratio for managing hedge funds’ active share to be about 7%. This figure is remarkably close to active expense ratios reported previously for equity mutual funds, which may be interpreted as evidence of uniform pricing for active portfolio management services.
Details
Keywords
Hsin-Hui Chiu and Lu Zhu
This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.
Abstract
Purpose
This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.
Design/methodology/approach
Mutual funds are grouped into different categories based on assets with different levels of risk perceptions (e.g. equity fund, money market fund), and this information is publicly accessible. This paper examines the correlation patterns between fund flows and changes in credit default swaps (CDS) spreads. In addition, it also examines such a relation by dividing the samples into different fund types (e.g. retail vs institutional fund flows).
Findings
This paper suggests that equity fund flows are negatively related to CDS spreads, whereas money market fund flows are positively related to CDS spreads. Furthermore, it indicates that retail fund flows provide insightful information and serve as the primary driver behind the relation between fund flows and CDS spreads.
Originality/value
The findings of this paper indicate that flows into equity and money market funds could serve as a risk sentiment in credit markets. And this is the first study, to the best of the author’s knowledge, to establish such a linkage between fund flows and CDS spreads to help investors gauge credit market sentiment.
Details
Keywords
Mahsa Hosseini, Mohammad Khodaei Valahzaghard and Ali Saeedi
This paper aims to study manipulation and performance persistence in equity mutual funds. To this end, Manipulation-Proof Performance Measure (MPPM) and Doubt Ratio, along with a…
Abstract
Purpose
This paper aims to study manipulation and performance persistence in equity mutual funds. To this end, Manipulation-Proof Performance Measure (MPPM) and Doubt Ratio, along with a number of current performance measures are used to evaluate the performance of equity mutual funds in Iran.
Design/methodology/approach
The authors investigate performance manipulation by 1) comparing the results of the MPPM with the current performance measures, 2) checking the Doubt Ratio to detect suspicious funds. Additionally, the authors investigate performance persistence by forming and evaluating portfolios of the equity mutual funds at several time horizons.
Findings
The authors conclude that there is no evidence of performance manipulation in the equity mutual funds. Additionally, when comparing the performance of the upper (top) tertile portfolios and the lower tertile portfolios, in all of the studied 1, 3, 6 and 12-month horizons, the authors find performance persistence in the equity mutual funds.
Originality/value
To the best of the authors’ knowledge, this research is the first study to investigate the performance manipulation in the Iranian equity mutual funds, and also is the first study in Iran that uses the MPPM and the Doubt Ratio in addition to a number of current performance measures to investigate the performance persistence in the equity mutual funds at several time horizons.
Details
Keywords
Desmond Pace, Jana Hili and Simon Grima
In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between active…
Abstract
Purpose
In the build-up of an investment decision, the existence of both active and passive investment vehicles triggers a puzzle for investors. Indeed the confrontation between active and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a bone of contention since the inception of these investment structures. Accordingly, the objective of this chapter is to distinctly underscore whether an investor should be concerned in choosing between active and diverse passive investment structures.
Methodology/approach
The survivorship bias-free dataset consists of 776 equity funds which are domiciled either in America or Europe, and are likewise exposed to the equity markets of the same regions. In addition to geographical segmentation, equity funds are also categorised by structure and management type, specifically actively managed mutual funds, index mutual funds and passive exchange traded funds (‘ETFs’). This classification leads to the analysis of monthly net asset values (‘NAV’) of 12 distinct equally weighted portfolios, with a time horizon ranging from January 2004 to December 2014. Accordingly, the risk-adjusted performance of the equally weighted equity funds’ portfolios is examined by the application of mainstream single-factor and multi-factor asset pricing models namely Capital Asset Pricing Model (Fama, 1968; Fama & Macbeth, 1973; Lintner, 1965; Mossin, 1966; Sharpe, 1964; Treynor, 1961), Fama French Three-Factor (1993) and Carhart Four-Factor (1997).
Findings
Solely examination of monthly NAVs for a 10-year horizon suggests that active management is equivalent to index replication in terms of risk-adjusted returns. This prompts investors to be neutral gross of fees, yet when considering all transaction costs it is a distinct story. The relatively heftier fees charged by active management, predominantly initial fees, appear to revoke any outperformance in excess of the market portfolio, ensuing in a Fool’s Errand Hypothesis. Moreover, both active and index mutual funds’ performance may indeed be lower if financial advisors or distributors of equity funds charge additional fees over and above the fund houses’ expense ratios, putting the latter investment vehicles at a significant handicap vis-à-vis passive low-cost ETFs. This chapter urges investors to concentrate on expense ratios and other transaction costs rather than solely past returns, by accessing the cheapest available vehicle for each investment objective. Put simply, the general investor should retreat from portfolio management and instead access the market portfolio using low-cost index replication structures via an execution-only approach.
Originality/value
The battle among actively managed and index replication equity funds in terms of risk-adjusted performance and alpha generation has been a grey area since the inception of mutual funds. The interest in the subject constantly lightens up as fresh instruments infiltrate financial markets. Indeed the mutual fund puzzle (Gruber, 1996) together with the enhanced growth of ETFs has again rejuvenated the active versus passive debate, making it worth a detailed analysis especially for the benefit of investors who confront a dilemma in choosing between the two management styles.
Details
Keywords
Zia-ur-Rehman Rao, Muhammad Zubair Tauni, Amjad Iqbal and Muhammad Umar
The purpose of this paper is to find whether Chinese equity funds outperform the market and do Chinese fund managers possess positive market timing ability. This study also aims…
Abstract
Purpose
The purpose of this paper is to find whether Chinese equity funds outperform the market and do Chinese fund managers possess positive market timing ability. This study also aims to investigate whether well-performing (worst) funds of last year continue to perform well (worst) in the following year.
Design/methodology/approach
Capital Asset Pricing Model and Carhart four-factor model are used for performance analysis, whereas for analyzing market timing ability, the Treynor and Mazuy (1966) and Henriksson and Merton (1981) models are applied. To investigate persistence in the performance of Chinese equity funds, all equity funds are divided, on the basis of performance in the past 12 months, into three equally weighted groups (high, middle and low) and then observed for next 12 months. After that, groups are again rebalanced according to their performance. This study uses a panel regression model for analysis.
Findings
Chinese equity funds are successful in providing higher than market returns, and fund managers possess positive market timing ability. The authors find that Chinese equity funds do not show persistence in performance as witnessed in developed markets. Well-performing funds (worst funds) of last year do not continue to provide higher (lower) return in the following year. Moreover, the authors detect positive relationship of fund size, age and expense ratio with the fund’s performance. Overall results suggest that emerging market equity funds show better performance than that of developed markets.
Practical implications
Investors are better off if they invest in equity funds instead of index funds, as results illustrate that equity funds outperformed the market. Further, the strategy of buying well-performing funds of last year and selling poorly performing funds of last year does not look very attractive in China. This study helps investors to understand the Chinese managed funds industry, and such an understanding is also helpful for fund managers and asset management companies who use performance information in marketing strategies.
Originality/value
This is the first study to investigate the performance persistence in Chinese equity funds and also contributes to the literature about the performance and market timing ability of equity funds. The study takes the sample of 520 equity funds for the period from 2004 to 2014, which includes a period of financial crisis of 2008.
Details
Keywords
– The purpose of this paper is to propose a novel theory of the equilibrium liquidity premia of private equity funds and explore its asset-pricing implications.
Abstract
Purpose
The purpose of this paper is to propose a novel theory of the equilibrium liquidity premia of private equity funds and explore its asset-pricing implications.
Design/methodology/approach
The theory assumes that investors are exposed to the risk of facing surprise liquidity shocks, which upon arrival force them to liquidate their positions on the secondary private equity markets at some stochastic discount to the fund’s current net asset value. Assuming a competitive market where fund managers capture all rents from managing the funds and investors just break even on their positions, liquidity premia are defined as the risk-adjusted excess returns that fund managers must generate to compensate investors for the costs of illiquidity. The model is calibrated to data of buyout funds and is illustrated by using numerical simulations.
Findings
The model analysis generates a rich set of novel implications. These concern how fund characteristics affect liquidity premia, the role of the investors’ propensities of liquidity shocks in determining liquidity premia and the impact of market conditions and cycles on liquidity premia.
Originality/value
This is the first paper that derives liquidity premia of private equity funds in an equilibrium setting in which investors are exposed to the risk of facing surprise liquidity shocks.
Details
Keywords
The paper's aim is to analyze and assess the importance of a recent US Court of Appeals for the First Circuit decision in the case of Sun Capital Partners III LP v. New England…
Abstract
Purpose
The paper's aim is to analyze and assess the importance of a recent US Court of Appeals for the First Circuit decision in the case of Sun Capital Partners III LP v. New England Teamsters and Trucking Industry Pension Fund with respect to the court's conclusion that a private equity fund constitutes a “trade or business” for purposes of the ERISA multiemployer pension withdrawal liability and that, therefore, the fund could, under a “piercing the veil” type of approach, be held liable for the ERISA withdrawal liability of a bankrupt portfolio company.
Design/methodology/approach
The paper provides historical background on termination and withdrawal liability under ERISA; explains the facts of the Sun Capital case; and offers preliminary reflections on the “investment plus” approach in ERISA context, the significance of the offset mechanism, why the Sun Capital decision is a significant victory for the Pension Benefit Guaranty Corporation, the liability of one portfolio company for the pension obligations of other portfolio companies owned by the same private equity fund, potential unintended consequences for tax-advantaged benefit plans of portfolio companies; the possibility that different pension plans at different portfolio companies may violate non-discrimination rules, the application of Sun Capital beyond ERISA, and the potential effect of this ruling on taxation of carried interest.
Findings
The employer and all “trades or businesses” in its “controlled group, including, under certain circumstances, a private equity fund, are liable for the employer's share of unfunded pension liabilities if the employer withdraws from a multi-employer defined-benefit pension plan.
Originality/value
Practical guidance from experienced financial services lawyers is given in the paper.
Details
Keywords
Mauricio Ballesteros-Ruiz and Felix Florencio Cardenas-del Castillo
The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe return on…
Abstract
The chapter provides a practical guide to identify and define different funding sources for entrepreneurial and innovation endeavors, including a methodology to describe return on investment expectations from funding sources. Also, the authors provide recommended key performance indicators and valuation methods when pitching to potential investors.
Details
Keywords
Helen Bishop, Michael Bradbury and Tony van Zijl
We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies…
Abstract
We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies over the period 1988 ‐ 2003. NZ IAS 32 has a broader definition of liabilities than does the corresponding current standard (FRS‐31) and it does not permit convertibles to be reported under headings that are intermediate to debt and equity. The results of the study indicate that in comparison with the reported financial position and performance, the reporting of convertibles in accordance with NZ IAS 32 would result in higher amounts for liabilities and higher interest. Thus, analysts using financial statement information to assess risk of financial distress will need to revise the critical values of commonly used measures of risk and performance when companies report under NZ IAS
Details