The Economics and Finance of Hedge Funds: A Review of the Academic Literature

Agarwal, Vikas; Mullally, Kevin; Naik, Narayan Y.

doi:10.1561/0500000047

Cited by 54 publications

(17 citation statements)

References 230 publications

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“…The difference between the two investor types might be even larger since prior evidence suggests that the ANcerno data set underrepresents skilled institutions. For instance, Jame () and Choi, Pearson, and Sandy () document no outperformance for the average hedge fund in ANcerno, whereas there is evidence of skill in the broader population (Kosowski, Naik, and Teo (); for a survey, see Agarwal, Mullally, and Naik ()). To the extent that ANcerno investors are less skilled than the average institution, they may also be more prone to distraction (Fang, Peress, and Zheng ()).…”

Section: Distraction and Noise Tradingmentioning

confidence: 99%

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Peress¹,

Schmidt

2020

The Journal of Finance

161

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In this paper, we study the impact of noise traders’ limited attention on financial markets. Specifically, we exploit episodes of sensational news (exogenous to the market) that distract noise traders. We find that on “distraction days,” trading activity, liquidity, and volatility decrease, and prices reverse less among stocks owned predominantly by noise traders. These outcomes contrast sharply with those due to the inattention of informed speculators and market makers, and are consistent with noise traders mitigating adverse selection risk. We discuss the evolution of these outcomes over time and the role of technological changes.

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Section: Distraction and Noise Tradingmentioning

confidence: 99%

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Peress¹,

Schmidt

2020

The Journal of Finance

161

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“…It is well documented in the academic literature (for a recent survey see e.g. Agarwal et al 2015) that commercial hedge fund databases are subject to various biases. Concerning CTAs in particular, Fung and Hsieh (1997) find that the average annual return of surviving funds is 3.4% higher than the average annual return of their total sample of 901 CTAs in the period 1986-1996.…”

Section: Biases In Commercial Hedge Fund Databasesmentioning

confidence: 99%

Performance, Persistence, and Pay: A New Perspective on CTAs

et al. 2017

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Using a large and representative dataset of commodity trading advisors (CTAs), we provide compelling evidence that CTAs generate significant net excess returns of at least 4.1% annually; that approximately 64% of the funds have positively skewed returns; and that there is considerable heterogeneity among CTAs, with systematic trend followers doing significantly better than other subcategories. More importantly, we find that CTAs not only beat passive, normative benchmarks, with a yearly gross alpha of at least 5.3% but also generate significant, incremental crisis alpha during periods of equity market turmoil. Finally, we show that cross-sectional differences in the performance of CTAs are persistent up to three years and that managerial compensation predicts fund performance. Our results are consistent with a rational market where investors compete to invest with successful CTA managers who use fees to signal their skills to investors.

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“…These include having access to only quarterly snapshots, coverage of only large long equity positions (more than 10,000 shares or 1 An incomplete list of papers that document the different risks explaining hedge fund performance include nonlinear risk (Agarwal and Naik, 2004;Fung and Hsieh, 2004), correlation risk (Buraschi, Kosowski, and Trojani, 2014), liquidity risk (Aragon, 2007;Sadka, 2010;Teo, 2011), macroeconomic uncertainty (Bali, Brown, and Caglayan, 2014), volatility risk (Bondarenko, 2004;Agarwal, Bakshi, and Huij, 2009;Agarwal, Arisoy, and Naik, 2017), rare disaster concerns (Gao, Gao, and Song, 2018), and tail risk (Agarwal, Ruenzi, and Weigert, 2017). For more details, see a recent survey by Agarwal, Mullally, and Naik (2015). 2 There are few notable exceptions that investigate disclosed derivative positions of hedge funds (Aragon and Martin, 2012;Aragon, Martin, and Shi, 2018;Joenväärä, Kauppila, and Tolonen, 2018).…”

Section: Introductionmentioning

confidence: 99%

Unobserved Performance of Hedge Funds

2018

Self Cite

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We investigate hedge funds' unobserved performance (UP), measured as the riskadjusted return difference between a fund firm's reported return and the hypothetical portfolio return derived from its long equity holdings disclosed on a quarterly basis. We find that high UP is (i) positively associated with measures of managerial incentives, discretion, and skill, and (ii) driven by a fund firm's intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. Fund firms with high UP outperform fund firms with low UP by more than 6% p.a. after accounting for typical hedge fund risk factors and fund characteristics.

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The Economics and Finance of Hedge Funds: A Review of the Academic Literature

Cited by 54 publications

References 230 publications

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

Performance, Persistence, and Pay: A New Perspective on CTAs

Unobserved Performance of Hedge Funds

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