A Thought or Two for Mutual Funds

Journal of Investment Compliance

2009

Self Cite

PurposeThe objective of this research is to educate investors and hedge fund industry stakeholders about a hedge fund manager's alarming activities prior to recognition of the fraud by the authorities. The lessons serve as red flags to stakeholders in the hedge fund industry such as prime brokers, auditors, administrators, accountants, custodians and government regulators, and especially investors conducting due diligence on hedge funds. A far‐reaching proposal is for the industry to found a hedge fund information depository (HFID) where participants/stakeholders provide information on any hedge fund on a regular basis. Such an information clearing‐house would facilitate a long overdue timely communication among hedge fund industry constituents. The services would be available for a fee. This service elevates transparency in the hedge fund community to an unprecedented level and could ultimately mitigate a manager's fraud.Design/methodology/approachA major hedge fund fraud case, Lancer Management Group, is used an example and application of HFID.FindingsInvestors in the Lancer funds lost more than $500 million. In the case of Lancer, there were several “alerts” or “triggers” many months before the actual filing of the SEC complaint against the fund. Hedge fund manager fraud could be mitigated through the establishment of the information depository. Had the depository been in place, some Lancer funds stakeholders could have made different decisions.Research limitations/implicationsSome hedge fund industry stakeholders may reluctantly join HFID. Researching the willingness of hedge fund industry stakeholders to join HFID would be a good extension of the current research.Practical implicationsHad a third party become aware of the alerts, this third party could have made a different investment decision. Most importantly, this depository would allow all the hedge fund industry stakeholders (accountants, administrators, auditors, marketers, prime brokers, custodians) to contemporaneously communicate with one another.Originality/valueThe approach and the solution are both unique. In addition, the topic is very controversial and timely, yet few business professionals explore research projects on fund manger fraud. HFID would be of great value to hedge fund industry stakeholders, especially investors.

“…Muhtaseb (2002, 2006) has written about the merits of hedge fund‐like investing. A key feature of hedge fund investing is significantly elevated manager risk.…”

Section: Introductionmentioning

confidence: 99%

Hedge fund information depository: a case study of a pre‐emptive solution to fund manager fraud

Journal of Investment Compliance

2009

Self Cite

“…Ennis and Sebastian (2003) find that after the stock market peaked in March of 2000 hedge funds in general did not provide protection to investors; rather it was the managers' good timing of the market. Muhtaseb (2003 and2006) discusses the merits of hedge funds like investing versus long only investing.…”

Section: Literature Reviewmentioning

confidence: 99%

Neutrality of equity market neutral strategy to period and index

Colborn

2012

J Deriv Hedge Funds

and former research director for Global Fund Analysis in London, England. His primary research interest is in portfolio management, especially hedge funds performance, activism and fraud. He has published many research articles in leading journals and run executive seminars and CFA review courses in major financial centers. He holds a PhD in finance from the University of Tennessee, Knoxville. He is a CFA charteholder and CAIA member. ABSTRACT This study examines the performance of equity market neutral (EMN) hedge funds by estimating alpha and beta, using monthly excess returns of the Fidelity Investments Spartan s US Bond Index Fund, 1 the S&P 500 index and two indices of EMN strategies. The study investigates how much exposure to systematic risk is experienced by EMN hedge funds and hence by the investors in such funds. In addition, the article ascertains the stability of the estimated betas of EMN hedge fund indices. Results show that EMN fund indices had no systematic (stock and bond market) risk before the subprime mortgage crises of 2008. During the crises, the DJ Credit Suisse EMN index showed a positive beta in excess of 0.4, yet the Greenwich Van Hedge EMN index showed a beta less than 0.1. Similarly, the DJ Credit Suisse EMN index had no bond market beta up until November 2008. The Greenwich Van Hedge EMN index had almost no exposure to the market. The results were sensitive to market conditions and the EMN index. DJCS and GVH both had positive stock market alphas, which turned insignificant around October 2008. Similarly, both indices had positive bond market alphas, which turned insignificant around August-November 2008. Robert 'Eric' Colborn

“…Provisions in the act will allow hedge funds to advertise responsibly to investors allowing fund mangers to present their strategies and performance through media channels available to mutual fund houses. Muhtaseb (2006) anticipated the progressive downsizing of the mutual funds as they have functioned before the introduction of exchange traded funds (ETFs). Traditional mutual funds are in their sunset years.…”

Section: Introductionmentioning

confidence: 99%

Growing role of hedge funds in the economy

2013

J Deriv Hedge Funds

The objective of this article is to document the profound and growing role of hedge funds in the economy. It is accomplished through identification and analysis of numerous activities normally associated with hedge funds that have become an integral part of capital market activities. Examples include the phenomenal growth of exchange traded funds (ETFs) and mutual funds that follow hedge fund strategies. The number of mutual funds that hedge, short sell and use leverage is increasing. Hedge funds are key suppliers of liquidity in the stock and US Treasury bond markets. Commercial banks are investing the mortgages they originate as opposed to selling them in secondary markets. Hedge funds make commercial loans and modify residential mortgages. They underwrite reinsurance policies. Hedge funds significantly influence corporate governance by playing key roles in acquisitions and corporate reorganizations. NASDAQ OMX recently began listing the alpha index options intended to allow investors to trade options on the relative performance of a stock or ETF as compared with SPY. Hedge funds invest in sovereign debt, negotiate good terms and reap the rewards. They launch philanthropic organizations. The legal and competitive landscape is evolving in such a manner that fosters hedge funds investment strategies for many years to come.