A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money

Baquero, Guillermo; Verbeek, Marno

doi:10.2139/ssrn.773384

Cited by 91 publications

(54 citation statements)

References 48 publications

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“…First, our results are related to papers studying the relationship between hedge fund flows and returns, see e.g. Goetzmann, Ingersoll and Ross (2003), Getmansky (2004), Baquero and Verbeek (2005), Agarwal, Daniel and Naik (2008), Ding, Getmansky, Liang and Wermers (2008), Fung, Hsieh, Naik and Ramadorai (2008, and Wang and Zheng (2008). Second, our results also complement those of Fung and Hsieh (2000) and Ding, Getmansky, Liang and Wermers (2007) who study the impact of hedge funds on the financial markets as a whole.…”

Section: Introductionsupporting

confidence: 77%

Arbitrage Capital and Currency Carry Trade Returns

Jylhä

Suominen

2009

SSRN Journal

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We develop a model based on risk averse investors and limited arbitrage capital to explain the rationale for the so called carry trades: that is, trades where "the purchase of riskier, higher-yielding assets is funded by selling lower-yielding currencies" (Financial Times, January 28, 2008). In our model, due to partially segmented markets and differences in inflation risk and money supply, the returns to carry trades are positive, but decrease in the amount of arbitrage capital. In the empirical part of the paper, using 32 years of exchange rate data, we document several new results related to carry trades and provide empirical support for the model's predictions. We empirically document that 1) carry trade returns explain a significant part of hedge fund index returns, providing strong evidence that carry trades are indeed used by arbitrageurs, 2) the positive returns to carry trades have been decreasing over time in parallel with an increase in arbitrage capital, 3) the real interest rates are higher in countries with higher inflation risk and higher per capita money supply, but higher arbitrageurs' equity capital and a better funding liquidity for them decrease the cross country differences in real interest rates, 4) flow of new arbitrage capital leads to an appreciation (depreciation) of the carry long (short) currencies.At the time of the paper, there is an ongoing large outflow of arbitrage capital from hedge funds, and this has been associated with a large appreciation of Japanese yen, US dollar and Swiss franc and a large depreciation of euro, Canadian dollar and British pound, in relation to most other currencies. These currency movements are consistent with our results, as at the time of the paper yen, US dollar and Swiss franc are carry trade short currencies and euro, Canadian dollar and British pound are carry trade long currencies.

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Section: Introductionsupporting

confidence: 77%

Arbitrage Capital and Currency Carry Trade Returns

Jylhä

Suominen

2009

SSRN Journal

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“…Lynch and Musto (2003) and Berk and Green (2004) provide models in which the convex relation between past performance and fund flow arises endogenously. Baquero and Verbeek (2005) as well as Ding, Getmansky, Liang, and Wermers (2009) confirm the convex performance flow relation for hedge funds.…”

Section: A Model Setupsupporting

confidence: 57%

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

Stahmer

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -electronic, mechanical, photocopying, recording, or otherwise -without the permission of ESMT. JEL classification: D53, D80, G01, G02, G11, G12, G20 * European School of Management and Technology (ESMT) Berlin, Germany, e-mail: axel.stahmer@esmt.org. Special thanks are due to Joerg Rocholl and Paul Heidhues for their extraordinary support and many useful comments that helped improve this paper. I am grateful to the ESMT and Humboldt University seminar participants, in particular Guillermo Baquero and Sascha Steffen as well as Christoph Wagner, Dora Simroth and Benedikt Meyer-Bretschneider for their constructive input. All errors are my own. I also wish to thank the JP Morgan team, which helped develop the paper idea. Terms of use: Documents in

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“…6 Finally, our paper is also related to the hedge fund literature. Baquero and Verbeek (2009) and Wang and Zheng (2008) show a positive contemporaneous relation between hedge fund flows and returns and Wang and Zheng (2008) and Avramov, Barars, and Kosowski (2009) find evidence of a negative relation between flows and future returns. Our study offers one channel through which flows have a positive return effect on the existing positions but decrease the future expected returns.…”

Section: The Modelmentioning

confidence: 97%

Speculative capital and currency carry trades

Jylhä

Suominen

2011

Journal of Financial Economics

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In this paper, we study a two-country general equilibrium model with partially segmented financial markets, where hedge funds emerge endogenously. Empirically, we show that the hedge fund investment strategy predicted by our model, which we call the "risk-adjusted carry trade" strategy, explains more than 16% of the overall hedge fund index returns and more than 33% of the fixed income arbitrage sub-index returns. The flow of new money to hedge funds affects market interest rates, exchange rates, and both the hedge funds' contemporaneous and expected future returns as predicted by the model.

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A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money

Cited by 91 publications

References 48 publications

Arbitrage Capital and Currency Carry Trade Returns

Arbitrage Capital and Currency Carry Trade Returns

Fund Flows Inducing Mispricing of Risk in Competitive Financial Markets

Speculative capital and currency carry trades

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