ContentsMulti-Period Performance Persistence Analysis of Hedge FundsVikas Agarwal and Narayan Y. Naik
Morningstar Ratings and Mutual Fund Performance
The Value of Active Mutual Fund Management:
An Examination of the Stockholdings and Trades of Fund Managers
The Value Line Enigma: The Sum of
Known Parts?
Performance and Characteristics of Swedish Mutual Funds
Performance Characteristics of Hedge Funds and Commodity Funds:
Natural vs. Spurious Biases
Tax-Motivated Trading and Price Pressure:
An Analysis of Mutual Fund Holdings
Monthly Measurement of Daily Timers
The Value Added from Investment Managers: An Examination of Funds of REITs
Hedge Funds: The Living and the Dead
Small Sample Analysis of Performance Measures in the Asymmetric Response
Model
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AbstractsMulti-Period Performance Persistence Analysis of Hedge Funds Since hedge funds specify significant lock-up periods, we investigate persistence in the performance of hedge funds using a multi-period framework in which the likelihood of observing persistence by chance is lower than in the traditional two-period framework. Under the null hypothesis of no manager skill (no persistence), the theoretical distribution of observing wins or losses follows a binomial distribution. We test this hypothesis using the traditional two-period framework and compare the findings with the results obtained using our multi-period framework. We examine whether persistence is sensitive to the length of return measurement intervals by using quarterly, half-yearly and yearly returns. We find maximum persistence at the quarterly horizon indicating that persistence among hedge fund managers is short term in nature. Morningstar Ratings and Mutual Fund Performance This study examines the Morningstar rating system as a predictor of mutual fund performance for U.S. domestic equity funds. We also compare the predictive abilities of the Morningstar rating system with those of alternative predictors. The results indicate findings that are robust across different samples, ages and styles of funds, and performance measures. First, low ratings from Morningstar generally indicate relatively poor future performance. Second, there is little statistical evidence that Morningstar's highest-rated funds outperform the next-to-highest and median-rated funds. Third, Morningstar ratings, at best, do only slightly better than the alternative predictors in forecasting future fund performance. The Value of Active Mutual Fund Management:
An Examination of the Stockholdings and Trades of Fund Managers We investigate the value of active mutual fund management by examining the stockholdings and trades of mutual funds. We find that stocks widely held by funds do not outperform other stocks. However, stocks purchased by funds have significantly higher returns than stocks they sell---this is true for large stocks as well as small stocks, and for value stocks as well as growth stocks. We find that growth-oriented funds exhibit better stock selection skills than income-oriented funds. Finally, we find only weak evidence that funds with the best past performance have better stock-picking skills than funds with the worst past performance. The Value Line Enigma: The Sum of
Known Parts? The investment advice encapsulated in the Value Line Investment Survey's timeliness rankings is evaluated from 1965 to 1996 through time-series factor regressions, as well as by comparing recommendations to benchmark portfolios corresponding to their size, book-to-market, and momentum characteristics. In addition, recommendations that have experienced recent earnings surprises are purged to eliminate the effects of post-earnings announcement drift. There is evidence that Value Line recommendations exhibit performance beyond what is predicted by existing models of expected return. However, once transactions costs have been accounted for, it is doubtful profitable abnormal returns could have been realized. Performance and Characteristics of Swedish Mutual Funds This paper studies the relation between fund performance and fund attributes in the Swedish market. Performance is measured as the alpha in a linear regression of fund returns on several benchmark assets, allowing for time-varying betas. The estimated performance is then used in a cross-sectional analysis of the relation between performance and fund attributes such as past performance, flows, size, turnover, and proxies for expenses and trading activity. The results show that good performance occurs among small equity funds, low fee funds, funds whose trading activity is high and, in some cases, funds with good past performance. Performance Characteristics of Hedge Funds and Commodity Funds:
Natural vs. Spurious Biases It is well known that the pro forma performance of a sample of investment funds contains biases. These biases are documented in Brown, Goetzmann, Ibbotson, and Ross (1992) using mutual funds as subjects. The organization structure of hedge funds, as private and often offshore vehicles, makes data collection a much more onerous task, amplifying the impact of performance measurement biases. This paper reviews these biases in hedge funds. We also propose using funds-of-hedge funds to measure aggregate hedge fund performance, based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds. Tax-Motivated Trading and Price Pressure:
An Analysis of Mutual Fund Holdings The 1986 Tax Reform Act (TRA) replaced non-synchronous tax year-ends with a common October 31 year-end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to October 31. A similar pattern is not present for funds before the TRA, or for other types of institutions either before or after the TRA. Examining stock returns in the first year the new TRA regulations became fully effective, we find evidence of a strong ``November effect'' for prior losers in which funds collectively had large holdings. Interestingly, fund managers appear to have learned from this experience. In subsequent years, our results suggest that funds were able to mitigate potential price pressures by having the foresight to spread tax-motivated sales over relatively long time horizons. Monthly Measurement of Daily Timers This paper addresses the bias associated with parametric measurement of timing skill based on monthly timer returns when timers can make daily timing decisions. Simulations suggest that the classic Henriksson-Merton parametric measure of timing skill is weak and biased downward when applied to the monthly returns of a daily timer. The paper proposes an adjustment that mitigates this problem without the need to collect daily timer returns. Four tests of timing skill, carried out on a sample of 558 mutual funds, show that very few funds exhibit statistically significant timing skill. More encompassing, the adjusted-FF3 test (based on the specification that incorporates both the proposed adjustment and the Fama-French three-factor model) is the least biased measure of timing skill among the four---it provides for a sharper inference regarding timing skill and helps mitigate biases associated with the choice of investment style. The Value Added from Investment Managers: An Examination of Funds of REITs This paper empirically analyzes REIT mutual funds. We show that, contrary to most mutual fund studies, the average and median alphas (net of expenses) are positive. We also find that time-varying positive alphas are much more likely to occur when the real asset market is performing poorly, suggesting that managers add more value in down markets than in up markets. We examine the cross-sectional determinants of both standard alphas and the average of time-varying alphas and find that both increase with assets and turnover. Cross-sectionally, we find that actively managed funds have higher alphas than passively managed funds. Hedge Funds: The Living and the Dead In this paper, I examine survivorship bias in hedge fund returns by comparing two large databases. I find that the survivorship bias exceeds 2% per year. Results of survivorship bias by investment styles indicate that the biases are different across styles. I reconcile the conflicting results about survivorship bias in previous studies by showing that the two major hedge fund databases contain different amounts of dissolved funds. Empirical results show that poor performance is the main reason for a fund's disappearance. Furthermore, I find that there are significant differences in fund returns, inception date, net assets value, incentive fee, management fee, and investment styles for the 465 common funds covered by both databases. Mismatching between reported returns and the percentage changes in NAVs can partially explain the differences in returns. Small Sample Analysis of Performance Measures in the Asymmetric Response
Model This paper reviews and extends definitions and properties of the three classical performance statistics (the Sharpe Ratio, the Treynor Index, and Jensen's Alpha) by locating them in a more general framework: the Asymmetric Response Model. This allows various notions of beta, which can be related to downside risk, to be employed, and includes, as special cases, a market timing model and the mean-variance CAPM. Due to the general lack of data on fund performance in practice, our emphasis is on small sample analysis where possible. We illustrate our results empirically using data on 15 U.S.-based emerging markets investment funds. |