• Selected
• Entire List

Abstract:
We examine the performance of the off-shore hedge fund industry over the period 1989 through 1995 using a database that includes both defunct and currently operating funds. The industry is characterized by high attrition rates of funds, low covariance with the U.S. stock market, evidence consistent with positive risk-adjusted returns over the time, but little evidence of differential manager skil.

Abstract:
We test the hypothesis that hedge funds were responsible for the crash in the Asian currencies in late 1997. To do so, we develop estimates of the changing positions of the largest ten currency funds in one currency, the Malaysian ringgit and to a basket of Asian currencies. Our methodology is adapted from the Sharpe?s (1992) style analysis approach that decomposes fund returns. We find that the net long or short positions in the ringgit or its correlates did fluctuate dramatically over the last four years. However, these fluctuations were not associated with moves in the exchange rate. The estimated net positions of the major funds were not unusual during the crash period, nor were the profits of the funds during the crisis. In sum, we find no empirical evidence to support the hypothesis that George Soros, or any other hedge fund manager was responsible for the crisis.

Abstract:
The popular perception is that hedge funds follow a reasonably well defined market-neutral investment style. While this long-short investment strategy may have characterized the first hedge funds, today hedge funds are a reasonably heterogeneous group. They are better defined in terms oftheir freedom from the constraints imposed by the Investment Company Act of 1940, than they are by the particular style of investment. We study the monthly return history of hedge funds over the period 1989 through to January 2000 and find that there are in fact a number of distinct styles of management. We find that differences in investment style contribute about 20 per cent of the crosssectional variability in hedge fund performance. This result is consistent across the years of our sample and is robust to the way in which we determine investment style. We conclude that appropriate style analysis and style management are crucial to success for investors looking to invest in this market.

Abstract:
The popular perception is that hedge funds follow a reasonably well defined market-neutral investment style. While this long-short investment strategy may have characterized the first hedge funds, today hedge funds are a reasonably heterogeneous group. They are better defined in terms of their freedom from the constraints imposed by the Investment Company Act of 1940, than they are by the particular style of investment. We study the monthly return history of hedge funds over the period 1989 through to January 2000 and find that there are in fact a number of distinct styles of management. We find that differences in investment style contribute about 20 per cent of the cross sectional variability in hedge fund performance. This result is consistent across the years of our sample and is robust to the way in which we determine investment style. We conclude that appropriate style analysis and style management are crucial to success for investors looking to invest in this market.

Abstract:
The popular perception is that hedge funds follow a reasonably well defined market-neutral investment style. While this long- short investment strategy may have characterized the first hedge funds, today hedge funds are a reasonably heterogeneous group. They are better defined in terms of their freedom from the constraints imposed by the Investment Company Act of 1940, than they are by the particular style of investment. We study the monthly return history of hedge funds over the period 1989 through to January 2000 and find that there are in fact a number of distinct styles of management. We find that differences in investment style contribute about 20 percent of the cross sectional variability in hedge fund performance. This result is consistent across the years of our sample and is robust to the way in which we determine investment style. We conclude that appropriate style analysis and style management are crucial to success for investors looking to invest in this market.

Abstract:
Alfred Cowles' (1934) test of the Dow Theory apparently provided strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. In this paper, we review Cowles' evidence and find that it supports the contrary conclusion -- that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that his timing strategies yield high Sharpe ratios and positive alphas. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the nature and content of the Dow Theory. This allows us to examine the properties of the Dow Theory itself out-of-sample.

Abstract:
Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. It is not generally understood that the incentive fee component of the fee on fee arrangement may under certain circumstances exceed the realized return on the fund. In this paper we argue that the disappointing after fee performance of some fund of funds may be explained by the nature of this fee arrangement. We examine an alternative fee arrangement that may provide better incentives at a lower cost to investors in these funds.

Abstract:
Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds might be explained by the nature of this fee arrangement, and that fund of funds providers may actually benefit from considering other possible fee arrangements. These alternative arrangements will improve reported performance and may make funds of funds more attractive to a growing institutional clientele.

Abstract:
Funds of funds are an increasingly popular avenue for hedge fund investment. Despite theincreasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractivehedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares inhedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. It is not generally understood that the incentive feecomponent of the fee on fee arrangement may under certain circumstances exceed the realized return on the fund. In this paper we argue that the disappointing after fee performance of some fund of funds may be explained by the nature of this fee arrangement. We examine an alternative feearrangement that may provide better incentives at a lower cost to investors in these funds.

Abstract:
Funds of funds are an increasing popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return to Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds might be explained by the nature of this fee argument, and that fund of funds providers may actually benefit from considering other possible fee arrangements. These alternative arrangements will improve reported performance and may make funds of funds more attractive to a growing institutional clientele.

Hedge funds, funds-of-funds, incentive fees

Abstract:
Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manaager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds may be explained by the nature of this fee arrangement. Fund of funds providers pass on individual hedge fund incentive fees in the form of after-fee returns, although they are in a better position to hedge these fees than are their investors. We examine a new fee arrangement emerging in the industry that may provide better incentives at a lower cost to investors in these funds.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However the diversification, oversight and access comes at the cost of a multiplication of the fees paid by the investor. One would expect that the information advantage of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds might be explained by the nature of this fee arrangement, and that fund of funds providers may actually benefit from considering other possible fee arrangements. These alternative arrangements will improve reported performance and may make funds of funds more attractive to a growing institutional clientele.

Abstract:
We investigate whether hedge fund and commodity trading advisor [CTA] return variance is conditional upon performance in the first half of the year. Our results are consistent with the Brown, Harlow and Starks (1994) findings for mutual fund managers. We find that good performers in the first half of the year reduce the volatility of their portfolios, but not vice-versa. The result that manager "variance strategies" depend upon relative ranking not distance from the high water mark threshold is unexpected, because CTA manager compensation is based on this absolute benchmark, rather than relative to other funds or indices. We conjecture that the threat of disappearance is a significant one for hedge fund managers and CTAs. An analysis of performance preceding departure from the database shows an association between disappearance and underperformance. An analysis of the annual hazard rates shows that performers in the lowest decile face a serious threat of closure. We find evidence to support the fact that survivorship and backfilling are both serious concerns in the use of hedge fund and CTA data.

Abstract:
We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpreted in terms of their characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out-of-sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.

Abstract:
We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpretable in terms of the characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out of sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.

Abstract:
We find evidence that is consistent with the hypothesis that daily mutual fund flows may be instruments for investor sentiment about the stock market. We use this finding to construct a new index of investor sentiment, and validate this index using data from both the United States and Japan. In both markets exposure to this factor is priced, and in the Japanese case, we document evidence of negative correlations between â¬SBullâ¬? and â¬SBearâ¬? domestic funds. The flows to bear foreign funds in Japan display some evidence of negative correlation to domestic and foreign equity funds, suggesting that there is a foreign vs. domestic sentiment factor in Japan that does not appear in the contemporaneous U.S. data. By contrast, U.S. mutual fund investors appear to regard domestic and foreign equity mutual funds as economic substitutes.

Abstract:
We find evidence that is consistent with the hypothesis that daily mutual fund flows may be instruments for investor sentiment about the stock market. We use this finding to construct a new index of investor sentiment, and validate this index using data from both the United States and Japan. In both markets exposure to this factor is priced, and in the Japanese case, we document evidence of negative correlations between â¬SBullâ¬? and â¬SBearâ¬? domestic funds. The flows to bear foreign funds in Japan display some evidence of negative correlation to domestic and foreign equity funds, suggesting that there is a foreign vs. domestic sentiment factor in Japan that does not appear in the contemporaneous U.S. data. By contrast, U.S.mutual fund investors appear to regard domestic and foreign equity mutual funds aseconomic substitutes.

Abstract:
We find evidence that is consistent with the hypothesis that daily mutual fund flows may be instruments for investor sentiment about the stock market. We use this finding to construct a new index of investor sentiment, and validate this index using data from both the United States and Japan. In both markets exposure to this factor is priced, and in the Japanese case, we document evidence of negative correlations between 'Bull' and 'Bear' domestic funds. The flows to bear foreign funds in Japan display some evidence of negative correlation to domestic and foreign equity funds, suggesting that there is a foreign vs. domestic sentiment factor in Japan that does not appear in the contemporaneous U.S. data. By contrast, U.S. mutual fund investors appear to regard domestic and foreign equity mutual funds as economic substitutes.

Abstract:
We find evidence that is consistent with the hypothesis that daily mutual fund flows may be instruments for investor sentiment about the stock market. We use this finding to construct a new index of investor sentiment, and validate this index using data from both the United States and Japan. In both markets exposure to this factor is priced, and in the Japanese case, we document evidence of negative correlations between "Bull" and "Bear" domestic funds. The flows to bear foreign funds in Japan display some evidence of negative correlation to foreign bull and equity funds. They appear to be independent of domestic bull and bear fund flows, suggesting that there is a foreign vs. domestic sentiment factor in Japan that does not appear in the contemporaneous U.S. data. By contrast, U.S. mutual fund investors appear to regard domestic and foreign equity mutual funds as economic complements.

Investor Sentiment, Mutual Fund Flows, Bull and Bear Funds, Factor Pricing Mod

Abstract:
Due diligence is an important source of alpha in a well designed hedge fund portfoliostrategy. It is generally understood that the high returns possible in investing in hedgefunds are somewhat offset by the relative lack of transparency on operational issues. Theperformance of a diversified hedge fund portfolio can be enhanced by excluding thosefunds likely to do poorly or fail due to operational risk concerns. However, effectivedue diligence is an expensive concern. This implies that there is a strong competitiveadvantage to those funds of funds sufficiently large to absorb this fixed and necessary cost. The consequent economies of scale that we document in funds of funds are quite substantial and support the proposition that due diligence is a source of alpha in hedge fund investment.

Hedge funds, operational risk, due diligence, alpha

Abstract:
Due diligence is an important source of alpha in a well designed hedge fund portfolio strategy. It is generally understood that the high returns possible in investing in hedge funds are somewhat offset by the relative lack of transparency on operational issues. The performance of a diversified hedge fund portfolio can be enhanced by excluding those funds likely to do poorly - or fail - due to operational risk concerns. However, effective due diligence is an expensive concern. This implies that there is a strong competitive advantage to those funds of funds sufficiently large to absorb this fixed and necessary cost. The consequent economies of scale that we document in funds of funds are quite substantial and support the proposition that due diligence is a source of alpha in hedge fund investment.

Hedge funds, operational risk, due diligence, alpha

Abstract:
Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow-performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.

Hedge funds, operational risk, SEC filing, Form ADV

Abstract:
Using a complete set of the SEC filing information on hedge funds (Form ADV) and the TASS data, we develop a quantitative model called the ω-Score to measure hedge fund operational risk. The ω-Score is related to conflict of interest issues, concentrated ownership, and reduced leverage in the ADV data. With a statistical methodology, we further relate the ω-Score to readily available information such as fund performance, volatility, size, age, and fee structures. Finally, we demonstrate that while operational risk is more significant than financial risk in explaining fund failure, there is a significant and positive interaction between operational risk and financial risk. This is consistent with rogue trading anecdotes that suggest that fund failure associated with excessive risk taking occurs when operational controls and oversight are weak.

mutual funds, hedge funds, investments, the Omega Score

Abstract:
Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a sample of 444 due diligence (DD) reports from a major hedge fund DD firm. A routine feature of due diligence is an assessment of integrity. We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm, and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk. We find that DD reports are typically performed after positive performance and investor inflows. We control for potential bias due to this and other potential conditioning. An operational risk score based on information contained in the DD reports significantly predicts subsequent fund failure and statistical performance characteristics out of sample. Finally we find that observed operational risk characteristics do not appear to moderate fund flow.

Abstract:
Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a sample of 444 due diligence (DD) reports from a major hedge fund DD firm. A routine feature of due diligence is an assessment of integrity. We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm, and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk. We find that DD reports are typically performed after positive performance and investor inflows. We control for potential bias due to this and other potential conditioning. An operational risk score based on information contained in the DD reports significantly predicts subsequent fund failure and statistical performance characteristics out of sample. Finally we find that observed operational risk characteristics do not appear to moderate fund flow.

Hedge Funds, Operational Risk, Due Diligence

Abstract:
Recent empirical evidence has suggested that the Japanese mutual fund industry has underperformed dramatically in the past two decades. Conjectured reasons for under performance range from tax-dilution effect to high fees, high turnover and poor asset management. In this paper, we show that this underperformance is largely due to tax-dilution effects and not necessarily due to poor management. Using a broad database of funds which includes investment trusts closed to new investment we show that once an instrument for the time-varying tax-dilution exposure is included in a factor model, there is little evidence of poor risk-adjusted performance. A style analysis of the industry demonstrates that managers appear to pursue tax-driven dynamic strategies.

Abstract:
Prospect theory of Kahneman and Tversky (1979) suggests that traders will typically lock in gains and gamble on losses. In extreme situations such behavior can lead to significant downside risk for fund investors. Weisman (2002) uses the term informationless investing to describe this behavior, and argues that these strategies are peculiar to the asset management industry in general, and the hedge fund industry in particular and that these strategies can produce the appearance of return enhancement without necessarily providing any value to an investor. We devise a simple procedure to determine whether a given pattern of trading is consistent with informationless investing and apply it to a unique database of daily transactions and holdings of a set of thirty nine successful Australian equity managers. While this pattern of trading does seem to characterize the portfolios of some of the largest funds in Australia, this phenomenon is limited to positions taken in individual securities within large and well diversified funds. For this reason the negative consequences for fund investors appear to be limited.

Prospect Theory, Disposition Effect, Risk management; Performance evaluation; Window dressing

Abstract:
Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in thepast several years. In part, the relative success of foreign managed firms inattracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramaticfashion over the past two decades. This is at best indirect evidence that Japanese funds under perform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that theunder performance can be attributed almost entirely to the unique tax environment of Japanese investment trusts, which had the effect of heavily penalizing early withdrawals. The relaxation of these regulations coincided with a major inflow of new money into the investment trust business. We examine the relative performance of Japanese and foreign investment management firms before and after this change in tax regulations, and find that the poor relative performance of Japanese funds from April 2000 through December 2001 may in part be attributed to the huge inflow of new moneyinto this sector and the style shifts made necessary to accommodate this flow.

Abstract:
Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in the past several years. In part, the relative success of foreign managed firms in attracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramatic fashion over the past two decades. This is at best indirect evidence that Japanese funds underperform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that the underperformance can be attributed almost entirely to the unique tax environment of Japanese investment trusts, which had the effect of heavily penalizing early withdrawals. The relaxation of these regulations coincided with a major inflow of new money into the investment trust business. We examine the relative performance of Japanese and foreign investment management firms before and after this change in tax regulations, and find that the poor relative performance of Japanese funds from April 2000 through December 2001 may in part be attributed to the huge inflow of new money into this sector and the style shifts made necessary to accommodate this flow.

Abstract:
A firm's book equity is a measure of the value held by a firm's ordinary shareholders. Increasingly, it is being reported as a negative number. Since the firm's limited liability structure means that shareholders' value cannot be negative value, negative book equity has no obvious interpretation. Consequently, both practitioners and academics typically omit such stocks. While these stocks are small in number they are disproportionately represented in extreme value/growth sectors, and therefore can have an impact on applications where 'value' is defined in terms of book equity. We propose a new approach that classifies negative book equity stocks across the value/growth spectrum by considering how close their returns correspond to stocks that fit more obviously into these classifications. We find that this new value factor, which includes negative book equity stock, is economically and statistically different from the old value factor that excludes such stocks. Although we illustrate how this approach can be used to classify negative book equity stock, the approach is quite general and may be used whenever particular accounting data are unavailable or otherwise suspect.

Abstract:
A firm's book equity is a measure of the value held by a firm's ordinary shareholders. Increasingly, it is being reported as a negative number. Since the firm's limited liability structure means that shareholders' value cannot be negative value, negative book equity has no obvious interpretation. Consequently, both practitioners and academics typically omit such stocks. While these stocks are small in number they are disproportionately represented in extreme value/growth sectors, and therefore can have an impact on applications where value is defined in terms of book equity. We propose a new approach that classifies negative book equity stocks across the value/growth spectrum by considering how close their returns correspond to stocks that fit more obviously into these classifications. We find that this new value factor, which includes negative book equity stock, is economically and statistically different from the old value factor that excludes such stocks. Although we illustrate how this approach can be used to classify negative book equity stock, the approach is quite general and may be used whenever particular accounting data are unavailable or otherwise suspect.

Negative book value, value factor, generalized style classification

Abstract:
Recent evidence suggests that global equity markets are becoming more risky. We find that much of the apparent increase in international variance and covariance of returns can be attributed to systematic variations in global risk premia correlated across markets, rather than to any fundamental change in the risk attributes of these markets. This result has interest both for practitioners and for those interested in modeling global asset prices.

Abstract:
Recent evidence suggests that global equity markets are becoming more risky. We find that much of the apparent increase in international variance and covariance of returns can be attributed to systematic variations in global risk premia correlated across markets, rather than to any fundamental change in the risk attributes of these markets. This result has interest both for practitioners and for those interested in modeling global asset prices.

Risk premia, international asset pricing models, global capital markets, global investments

Abstract:
We test the hypothesis that hedge funds were responsible for the crash in the Asian currencies in late 1997. To do so, we develop estimates of the changing positions of the largest ten currency funds in one currency, the Malaysian ringgit and to a basket of Asian currencies. Our methodology is adapted from the Sharpe's (1992) style analysis approach that decomposes fund returns. We find that the net long or short positions in the ringgit or its correlates did fluctuate dramatically over the last four years. However, these fluctuations were not associated with moves in the exchange rate. The estimated net positions of the major funds were not unusual during the crash period, nor were the profits of the funds during the crisis. In sum, we find no empirical evidence to support the hypothesis that George Soros, or any other hedge fund manager was responsible for the crisis.

Abstract:
We test the hypothesis that hedge funds were responsible for the crash in the Asian currencies in late 1997 . To do so, we develop estimates of the changing positions of the largest ten currency funds in one currency, the Malaysian ringgit and to a basket of Asian currencies. Our methodology is adapted from the Sharpe's (1992) style analysis approach that decomposes fund returns. We find that the net long or short positions in the ringgit or its correlates did fluctuate dramatically over the last four years. However, these fluctuations were not associated with moves in the exchange rates. The estimated net positions of the major funds were not unusual during the crash period, nor were the profits of the funds during the crisis. In sum, we find no empirical evidence to support the hypothesis that George Soros, or any other hedge fund manager was responsible for the crisis.

Abstract:
Two major conclusions follow from this very careful study. First, sophisticated prediction tools do not fare well relative to naive models predicting return based on past sample means. Second, there appear to be short-lived episodes of quite limited return predictability. These conclusions are consistent with all we know from the theoretical developments in financial economics over the past thirty five years and more. Yet how do we reconcile these facts with the widespread perception that market returns are in fact predictable, and that hedge funds in particular are adept at exploiting this predictability?

Abstract:
Investors in hedge funds and commodity trading advisors [CTA s] are naturally concerned with risk as well as return. In this paper, we investigate risk of hedge funds and CTA s in light of managerial career concerns. We find an association between past performance and risk levels consistent with Brown, Harlow and Starks (1996) findings for mutual fund managers. Good performers in the first half of the year reduce the volatility of their portfolios, and poor performers increase volatility. These variance strategies" depend upon the fund s ranking relative to other funds. The importance of relative rankings as opposed to the absolute ranking suggested by analysis of hedge fund and CTA manager contracts points to the importance of reputation costs. These costs are best thought of in the context of the career concerns of managers and the relative importance of fund termination. We analyze factors contributing to fund disappearance. Survival depends on both absolute and relative performance. Excess volatility can also lead to termination. Finally, other things equal, the younger a fund, the more likely it is to disappear from the sample. Therefore our results strongly confirm an hypothesis of Fung and Hsieh (1997b) that reputation costs have a mitigating effect on the gambling incentives implied by the manager contract. Particularly for young funds, a volatility strategy that increases the value of a performance fee option may lead to the premature death of that option through termination of the fund. The finding that hedge fund and CTA volatility is conditional upon past performance has implications for investors, lenders and regulators. An important result of our finding is that variance strategy depends upon relative rather than absolute performance evaluation.

Abstract:
Investors in hedge funds and commodity trading advisors [CTA s] are naturally concerned with risk as well as return. In this paper, we investigate risk of hedge funds and CTA s in light of managerial career concerns. We find an association between past performance and risk levels consistent with Brown, Harlow and Starks (1996) findings for mutual fund managers. Good performers in the first half of the year reduce the volatility of their portfolios, and poor performersincrease volatility. These variance strategies" depend upon the fund s ranking relative to other funds. The importance of relative rankings as opposed to the absolute ranking suggested by analysis of hedge fund and CTA manager contracts points to the importance of reputation costs.These costsare best thought of in the context of the career concerns of managers and the relative importance of fund termination. We analyze factors contributing to fund disappearance. Survival depends on both absolute and relative performance. Excess volatility can also lead to termination. Finally, other things equal, the younger a fund, the more likely it is to disappear from the sample. Therefore our results strongly confirm an hypothesis of Fung and Hsieh (1997b) that reputation costs have a mitigating effect on the gambling incentives implied by the manager contract. Particularly for young funds, a volatility strategy that increases the value of a performance fee option may lead to the premature death of that option through termination of the fund. The finding that hedge fund and CTA volatility is conditional upon past performance has implications for investors, lenders and regulators. An important result of our finding is that variance strategy depends upon relative rather than absolute

Abstract:
Brown, Goetzmann and Ross (1995) document that ex-post conditioning can significantly bias empirical results based on observed rates of return. These results have interesting implications for cross-sectional cumulated excess return measures [CAR s] that are commonly used in the context of event studies (see Brown and Warner, 1981). Ball and Brown [1968] note an upward drift in cumulated excess returns subsequent to a positive earnings announcement surprise. Subsequent work by Foster [1977] and Foster et al [1984] among others has documented that this drift is related to size of the firm in question. The current state of this literature is summarized in Ball [1992].

Abstract:
Empirical analysis of rates of return in Finance implicitly condition on the security surviving into the sample. We investigate the implications of such conditioning on the time series of rates of return. In general this conditioning induces a spurious relationship between observed return and total risk for those securities that survive to be included in the sample. This result has immediate implications for the equity premium puzzle. We show how these results apply to other outstanding problems of empirical Finance. Long term autocorrelation studies focus on the statistical relation between successive holding period returns, where the holding period is of possibly extensive duration. If the equity market survives, then we find that average return in the beginning is higher than average return near the end of the time period. For this reason, statistical measures of long-term dependence are typically biased towards the rejection of a random walk. The result also has implications for event studies. There is a strong association between the magnitude of an earnings announcement and the post-announcement performance of equity. This might be explained in part as an artifact of the stock price performance of firms in financial distress that survive an earnings announcement. The final example considers stock split studies. In this analysis we implicitly exclude securities whose price on announcement is less than the prior average stock price. We apply our results to this case, and find that the condition that the security forms part of our positive stock split sample suffices to explain the upward trend in event-related cumulated excess return in the pre-announcement period.

Abstract:
We propose a new empirical approach to determination of mutual fund styles. This approach is simple to apply, yet it captures nonlinear patterns of returns that result from virtually all active portfolio management styles. We find that the largest equity fund category, â¬SGrowthâ¬? typically breaks down into several styles that differ in composition and strategy. Our classification method identifies fund groupings that are useful predictors of cross-sectional future performance, as well as past behavior. Not only are they superior to common classifications such as â¬SGrowthâ¬? or â¬SIncome,â¬? but they also outperform classifications based upon risk measures and analogue portfolios.

Abstract:
We examine the performance of the offshore hedge fund industry over the period 1989 through 1995 using a database that includes defunct as well as currently operating funds. The industry is characterized by high attrition rates of funds and little evidence of differential manager skill. We develop endogenous style categories for relative fund performance measures and find that repeat-winner and repeat-loser patterns in the data are largely due to style effects in that data.

Abstract:
We examine the performance of the offshore hedge fund industry over the period 1989 through 1995 using a database that includes defunct as well as currently operating funds. The industry is characterized by high attrition rates of funds and little evidence of differential manager skill. We develop endogenous style categories for relative fund performance measures and find that repeat-winner and repeat-loser patterns in the data are largely due to style effects in that data.

Abstract:
Using a complete set of the SEC filing information on hedge funds (Form ADV) and the TASS data, we develop a quantitative model called the É-Score to measure hedge fund operational risk. The É-Score is related to conflict of interest issues, concentrated ownership, and reduced leverage in the ADV data. With a statistical methodology, we further relate the É-Score to readily available information such as fund performance, volatility, size, age, and fee structures. Finally, we demonstrate that this risk score can be used to effectively predict fund failures in the future.

Abstract:
This paper examines the trading strategy attributed to Mr. Nicholas Leeson, who was the chief derivatives trader of Barings bank in Singapore. His activities were the main cause of the eventual collapse of Barings bank. Daily information is available for the full period Leeson was active in Singapore, from January 1992 until 1995, for all relevant products. The information includes daily volume, open interest, opening, closing, highest and lowest price. The empirical evidence suggests that Leeson followed a doubling strategy: he continuously doubled his position as prices were falling.

Abstract:
active equity portfolios. Active management is dependent on the success of two importantcomponents in the investment process stock selection skill and portfolio management. Ourstudy documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smalleraggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Portfolio concentration, investment performance, tracking error, active funds

Abstract:
This study examines the relationship between investment performance and concentration inactive equity portfolios. Active management is dependent on the success of two importantcomponents in the investment process stock selection skill and portfolio management. Ourstudy documents a positive relationship between fund performance and portfolio concentration.The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smalleraggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Portfolio concentration, investment performance, tracking error, active funds

Abstract:
Recent results from the hedge fund literature provide evidence that option-based risk factors may be a significant factor in managed fund returns. By examining a unique database of high-frequency holdings and transactions from a representative sample of forty Australian equity funds we find that exposure to these option-based risk factors may well arise from trading activity rather than from derivative positions that generate similar payouts. While the resulting concave payout patterns are associated with large and significant alphas in our sample, these alphas may be more a compensation for a modest increase in tail risk exposure than they are a reward for information-based trading.

Performance measurement, market timing measures, disposition effect, overlay strategies

Abstract:
Mandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SECrequirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow-performance relationships. Investorseither lack this information or regard it as immaterial. These findings suggest thatregulators should account for the endogenous production of information and the marginalbenefit of disclosure to different investment clienteles.

Hedge funds, operational risk, SEC filing, Form ADV

Abstract:
We examine the performance of the off-shore hedge fund industry over the period 1989-1995 using a database that includes both defunct and currently operating funds. The industry is characterized by high attrition rates of funds, low covariance with the U.S. stock market, evidence consistent with positive risk-adjusted returns over the time, but little evidence of differential manager skill.

Abstract:
The recent paper by Goetzmann et al. (2002) suggests that fund managers subject to aperformance review have an adverse incentive to engage in portfolio strategies that have the unfortunate attribute that they can expose the fund investor to significant downside risk. Weisman(2002) uses the term â¬Sinformationless investingâ¬? to describe this behavior, and argues that these strategies are â¬Speculiar to the asset management industry in general, and the hedge fund industry inparticularâ¬? and that these strategies â¬Scan produce the appearance of return enhancement without necessarily providing any value to an investor.â¬? Just how prevalent are these practices in the fundmanagement business? On the basis of a unique database of daily transactions and holdings of a set of forty successful Australian equity managers, we find evidence that individual managers do engagein this trading behavior, particularly when they form part of a team within a large decentralized money management operation and are compensated in the form of an annual bonus based on performance. This result is broadly consistent with the theoretical and empirical results of theprincipal agent literature which highlight the adverse consequences for the long term objectives of principals where agents are compensated based on observable short term performance. It is also consistent with recent results from the behavioral finance literature which suggest that agentsnarrowly focus on individual security gambles independent of overall portfolio value considerations.

Informationless Trading, Sharpe Ratios, Performance Evaluation

Abstract:
The recent paper by Goetzmann et al. (2002) suggests that fund managers subject to a performance review have an adverse incentive to engage in portfolio strategies that have the unfortunate attribute that they can expose the fund investor to significant downside risk. Weisman (2002) uses the term â¬Sinformationless investingâ¬? to describe this behavior, and argues that these strategies are â¬Speculiar to the asset management industry in general, and the hedge fund industry in particularâ¬? and that these strategies â¬Scan produce the appearance of return enhancement without necessarily providing any value to an investor.â¬? Just how prevalent are these practices in the fund management business? On the basis of a unique database of daily transactions and holdings of a set of forty successful Australian equity managers, we find evidence that individual managers do engage in this trading behavior, particularly when they form part of a team within a large decentralized money management operation and are compensated in the form of an annual bonus based on performance. This result is broadly consistent with the theoretical and empirical results of the principal agent literature which highlight the adverse consequences for the long term objectives of principals where agents are compensated based on observable short term performance. It is also consistent with recent results from the behavioral finance literature which suggest that agents narrowly focus on individual security gambles independent of overall portfolio value considerations.

Informationless Trading, Sharpe Ratios, Performance Evaluation

Abstract:
Investors in hedge funds and commodity trading advisors [CTA] are naturally concerned with risk as well as return. In this paper, we investigate whether hedge fund and CTA return variance depends upon whether the manager is doing well or poorly. Our results are consistent with the Brown, Harlow and Starks (1996) findings for mutual fund managers. We find that good performers in the first half of the year reduce the volatility of their portfolios, and poor performers increase volatility. These variance strategies" depend upon the fund s ranking relative to other funds. Interestingly enough, despite theoretical predictions, changes in risk are not conditional upon distance from the high water mark threshold, i.e. a ratcheting absolute manager benchmark. This result may be explained by the relative importance of fund termination. We analyze factors contributing to fund disappearance. Survival depends on both absolute and relative performance. Excess volatility can also lead to termination. Finally, other things equal, the younger a fund, the more likely it is to fail. Therefore our results strongly confirm an hypothesis of Fung and Hsieh (1997b) that reputation costs have a mitigating effect on the gambling incentives implied by the manager contract. Particularly for young funds, a volatility strategy that increases the value of a performance fee option may lead to the premature death of that option through termination of the fund. The finding that hedge fund and CTA volatility is conditional upon past performance has implications for investors, lenders and regulators.

Abstract:
The predictability of abnormal returns based on information contained in past earnings announcements is a statistically and economically significant anomaly. Neither is it illusory, nor is it an artifact of the experimental design. It may be a result of market inefficiency. Our results cannot rule out this explanation. However, we find that the magnitude of the post-earnings announcement effect is correlated with factors that proxy for the ex ante probability of the firm surviving to be part of the earnings surprise sample, and with determinants of the bid-ask spread.

Abstract:
Recent empirical evidence has suggested that the Japanese mutual fund industry has under-performed dramatically over the past two decades. Conjectured reasons for underperformance range from tax-dilution effects to high fees, high turnover and poor asset management. In this paper, we show that this underperformance is largely due to tax-dilution effects, and not necessarily to poor management. Using a broad database of funds which includes investment trusts closed to new investment, we show that once an instrument for the time-varying tax dilution exposure is included in a factor model, there is little evidence of poor risk-adjusted performance. A style analysis of the industry demonstrates that managers appear to pursue tax-driven dynamic strategies.

Abstract:
Recent empirical evidence has suggested that the Japanese mutual fund industry has" underperformed dramatically over the past two decades. Conjectured reasons for" underperformance range from tax-dilution effects to high fees, high turnover and poor asset" management. In this paper, we show that this underperformance is largely due to tax-dilution" effects, and not necessarily to poor management. Using a broad database of funds which" includes investment trusts closed to new investment, we show that once an instrument for the" time-varying tax-dilution exposure is included in a factor model, there is little evidence of poor" risk-adjusted performance. A style analysis of the industry demonstrates that managers appear to" pursue tax-driven dynamic strategies.

Abstract:
Alfred Cowles' (1934) test of the Dow Theory apparently provided strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. In this paper we review Cowles' evidence and find that it supports the contrary conclusion - that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that his timing strategies yield high Sharpe ratios and positive alphas. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the nature and content of the Dow Theory. This allows us to examine the properties of the Dow Theory itself out-of-sample.

Abstract:
Recent evidence suggests that global equity markets are becoming more risky. We find that much of the apparent increase in international variance and covariance of returns can be attributed to systematicvariations in global risk premia correlated across markets, rather than to any fundamental change in the risk attributes of these markets. This result has interest both for practitioners and for those interested inmodeling global asset prices.

Risk premia, international asset pricing models, global capital markets, global investments

Abstract:
Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in the past several years. In part, the relative success of foreign managed firms in attracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramatic fashion over the past two decades. This is at best indirect evidence that Japanese funds underperform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that the underperformance can be attributed almost entirely to the unique tax environment of Japanese investment trusts, which had the effect of heavily penalizing early withdrawals. The relaxation of these regulations coincided with a major inflow of new money into the investment trust business. We examine the relative performance of Japanese and foreign investment management firms before and after this change in tax regulations, and find that the poor relative performance of Japanese funds from April 2000 through December 2001 may in part be attributed to the huge inflow of new money into this sector and the style shifts made necessary to accommodate this flow.

Abstract:
Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in the past two years. In part, the relative success of foreign managed firms in attracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramatic fashion over the past two decades. This is at best indirect evidence that Japanese funds underperform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that the underperformance can be attributed almost entirely to the unique tax environment of Japanese investment trusts. In this paper we examine the relative performance issue directly by looking at week by week returns for the period January 23, 1998 through to January 14, 2000. Contrary to popular perception, Japanese managers actually outperformed their foreign counterparts over this period of time. Perhaps this indicates that Japanese managers are more skillful. However, the evidence suggests that they happened to be in the right place at the right time. We attribute the superior performance to the asset allocation decision, rather than to any superior skill in selecting securities.

Abstract:
Foreign investment management firms have recently started to play a major role in the investment trust business in Japan. In terms of assets under management, their size and market share have almost doubled in thepast two years. In part, the relative success of foreign managed firms in attracting market share may be attributed to the fact that Japanese investment trusts have underperformed benchmarks in quite a dramaticfashion over the past two decades. This is at best indirect evidence that Japanese funds underperform their foreign counterparts. In a recent paper (Brown, Goetzmann, Hiraki, Otsuki and Shiraishi 2001) we show that theunderperformance can be attributed almost entirely to the unique tax environment of Japanese investment trusts. In this paper we examine the relative performance issue directly by looking at week by week returns for the period January 23, 1998 through to January 14, 2000. Contrary to popularperception, Japanese managers actually outperformed their foreign counterparts over this period of time. Perhaps this indicates that Japanese managers are more skillful. However, the evidence suggests that theyhappened to be in the right place at the right time. We attribute the superiorperformance to the asset allocation decision, rather than to any superior skill in selecting securities.

Abstract:
This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process - stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find that more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions that are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Abstract:
Using a complete set of U.S. SEC filing information on hedge funds (Form ADV) and data from the Lipper TASS Hedge Fund Database, the study reported here developed a quantitative model called the É-score to measure hedge fund operational risk. The É-score is related to conflict-of-interest issues, concentrated ownership, and reduced leverage in the Form ADV data. With a statistical methodology, the study further related the É-score to such readily available information as fund performance, volatility, size, age, and fee structures. Finally, the study demonstrated that although operational risk is more significant than financial risk in explaining fund failure, a significant and positive interaction exists between operational risk and financial risk.

Risk Measurement and Management: Alternative Investments; Portfolio Management: Hedge Fund strategies; Alternative Investments: Hedge Fund Strategies

Abstract:
We explore performance persistence in mutual funds using absolute and relative benchmarks. Our sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists, however persistence is mostly due to funds that lag the S&P 500. A profit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed, and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories, or risk adjustment procedures.

Abstract:
We examine the performance of the off-shore hedge fund industry over the period 1989 through 1995 using a database that includes both defunct and currently operating funds. The industry is characterized by high attrition rates of funds, low covariance with the U.S. stock market, evidence consistent with positive risk-adjusted returns over the time, and little evidence of differential manager skill.

Abstract:
In this paper, we find that existing classifications do a poor job at forecasting differences in future performance. We propose a different method for grouping mutual funds which is relatively impervious to strategic "gaming" of benchmarks. In particular, it captures active portfolio management strategies, rather than relying upon the fund composition observed at specific points in time. As a result of our classification, we find that equity fund managers broadly fall into some familiar and not-so-familiarpatterns of behavior. The familiar patterns include "Small-Cap", "Growth", "Growth and Income", "Income" and "International" styles. The unfamiliar styles resemble "Timers," "Value" and "Glamour" managers. This new categorization does a superior job at forecasting future differences in mutual fund performance, and reveals something about the aggregate behavior of mutual fund managers as well. In addition, we find some preliminary evidence that funds which changed their self-reported classification improved their position relative to their new benchmark.

Abstract:
The predictability of abnormal returns based on information contained in past earnings announcements is an anomaly that is statistically and economically significant. It is neither illusory, nor an artifact of the experimental design. It may be a result of market inefficiency. Our results cannot rule out this explanation. However, we find that earnings change numbers are associated with the probabilities that firms leave the sample through acquisition, bankruptcy and for other reasons, and with the probability that they are not included in the sample in the first place. Moreover, we find that the magnitude of the post-earnings announcement effect is correlated with factors that proxy for the ex ante probability of the firm surviving to be part of the earnings surprise sample. It also appears to be related to determinants of the bid-ask spread.

Abstract:
This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process - stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Portfolio concentration, investment performance, tracking error, active funds