Hedge funds vs SEO firms: a comparative analysis

Abstract

Purpose The purpose of this paper is to determine if hedge funds perform poorly as claimed by more recent research. The authors find hedge funds perform well from 2001 to 2013 when compared to sample of firms known to experience superior performance, namely, a sample of seasoned equity offerings (SEOs). Design/methodology/approach This paper uses a portfolio approach in comparing the performance of hedge funds and SEO firms. Other comparisons involve a number of common methodologies used to compute and analyze short-run and long-run returns. Findings Contrary to a growing and prevalent belief, the paper offers evidence hedge funds as a whole have performed well for a recent 13-year period. This finding includes periods up to six years around SEO announcement months. Research limitations/implications This paper is limited to examining monthly returns for a portfolio of hedge funds. This limitation led to incorporating a portfolio approach. Practical implications The findings suggest that a portfolio of hedge funds are an important investment consideration. This consideration has practical implications because investing in a portfolio of hedge funds has become more available for all investors in recent years. Social implications Society can be enhanced as this paper helps future investors make optimal investment decisions. Originality/value This paper adds to the hedge fund research by being the first paper to compare the performance of hedge funds with that for firms undergoing an important corporate event. The findings are new and can impact investment decision making.

Hedge fund variables and short-run SEO returns

“…1. Our price pattern examination is more detailed than Hull et al (2017). Thus, were we to perform their long-term tests, we would not agree with all of the details of their portfolio analysis but would agree with their general conclusion that a hedge fund portfolio and an SEO portfolio can perform similarly when adjusted for risk.…”

“…It shows researchers should consider institutional trading strategies when studying the market response to a major corporate event. Keywords Seasoned equity offerings, Hedge fund strategies, Insider ownership Paper type Research paperThis paper is motivated by the study of Hull et al (2017) who suggest future research undertakes the task of exploring stock returns around major corporate announcements by using a regression methodology where HFVs are tested with traditional independent variables. Using a sample of 1,189 SEOs, buy and hold abnormal returns (BHARs) are regressed against 4 HFVs and 12 nonhedge fund variables (NFVs).…”

“…This paper is motivated by the study of Hull et al (2017) who suggest future research undertakes the task of exploring stock returns around major corporate announcements by using a regression methodology where HFVs are tested with traditional independent variables. Using a sample of 1,189 SEOs, buy and hold abnormal returns (BHARs) are regressed against 4 HFVs and 12 nonhedge fund variables (NFVs).…”

“…Corwin (2003) shows SEO underpricing averaged 1.15 percent during 1980-1989 and increased to 2.92 percent during 1990-1998 peaking at 3.72 percent in 1996. Hull et al (2017) examine SEOs during 2004-2010 and find the average offer price is set 3.84 percent below the price that the final (or statutory) prospectus reports as the current market price.…”

Hedge fund stratagems and long-run SEO firm performance

“…While the SEO event period research (Asquith and Mullins, 1986;Masulis and Korwar, 1986;Hull, 1999;Errunza and Miller, 2003;Hull et al, 2012) is abundant, research using the proportion of hedge funds applying a strategy to explain SEO firm price behavior is a more recent phenomenon (Hull et al, 2014(Hull et al, , 2017(Hull et al, , 2018. The SEO firm research has documented distinct patterns of stock price behavior around SEO announcements characterized by positive performance before the announcement month and poorer performance after the announcement.…”