Risks and Portfolio Decisions Involving Hedge Funds

Agarwal, Vikas; Naik, Narayan Y.

doi:10.1093/rfs/hhg044

Cited by 1,067 publications

(817 citation statements)

References 36 publications

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“…Hedge funds can follow much more dynamic trading strategies and can take short as well as The results using the 6-factor model of Agarwal and Naik (2004) are similar.…”

Section: Performance At Hedge Fundsmentioning

confidence: 77%

The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?

et al. 2011

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“…Hedge funds can follow much more dynamic trading strategies and can take short as well as The results using the 6-factor model of Agarwal and Naik (2004) are similar.…”

Section: Performance At Hedge Fundsmentioning

confidence: 77%

The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?

et al. 2011

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“…Arguably, hedge funds may change their weights on the buy-and-hold and buy-and-hedge strategies in response to changes in investment opportunities and market conditions, an issue we explore in detail, later in the paper. 15 To further highlight the economic importance of the X factors, we also compare the adjusted-R 2 from our model with adjusted-R 2' s from other models used in the hedge fund literature including the Carhart (1997) model augmented with out-of-the-money call and put options on S&P 500 index as in Agarwal and Naik (2004) and the Fung and Hsieh (2004) seven-factor model. The results in Appendix A show that the explanatory power from these models ranges from 7% to 30%, which is substantially lower than the range of 24% to 53% obtained with our more parsimonious model.…”

Section: A Model Of Ca Hedge Fund Returnsmentioning

confidence: 99%

“…Panel A reports the results from the Carhart (1997) 4-factor model augmented with the out-of-the-money call (OTM CALL) and put (OTM PUT) option factors as in Agarwal and Naik (2004). The 4factor model of Carhart (1997) includes MKTRF, SMB, HML, and MOM that refer to excess returns on the market (valueweighted return on all NYSE, AMEX, and NASDAQ stocks minus the one-month Treasury bill rate), Fama-French (1993) size and bookto-market factors, and momentum factor.…”

Section: Table 12mentioning

confidence: 99%

“…Our paper contributes to the growing literature on identifying risk factors that drive different hedge fund strategies' returns such as trend-following strategy (Fung and Hsieh (2001)), merger arbitrage strategy (Mitchell and Pulvino (2001)), equity-oriented hedge fund strategies (Agarwal and Naik (2004)), equity pairs trading strategy (Gatev et al (2006)), and fixed income arbitrage strategy (Duarte et al (2007);Fung and Hsieh (2004)). Our empirical findings complement the recent work of Choi et al (2009) andChoi et al (2010).…”

Section: Introductionmentioning

confidence: 97%

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Risk and return in convertible arbitrage: Evidence from the convertible bond market

Agarwal

Fung

Loon

et al. 2011

Journal of Empirical Finance

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In this paper, we identify and document the empirical characteristics of the key drivers of convertible arbitrage as a strategy and how they impact the performance of convertible arbitrage hedge funds. We show that the returns of a buy-and-hedge strategy involving taking a long position in convertible bonds ("CBs") while hedging the equity risk alone explains a substantial amount of these funds' return dynamics. In addition, we highlight the importance of non-price variables such as extreme market-wide events and the supply of CBs on performance. Out-ofsample tests provide corroborative evidence on our model's predictions. At a more micro level, larger funds appear to be less dependent on directional exposure to CBs and more active in shorting stocks to hedge their exposure than smaller funds. They are also more vulnerable to supply shocks in the CB market. These findings are consistent with economies of scale that large funds enjoy in accessing the stock loan market. However, the friction involved in adjusting the stock of risk capital managed by a large fund can negatively impact performance when the supply of CBs declines. Taken together, our findings are consistent with convertible arbitrageurs collectively being rewarded for playing an intermediation role of funding CB issuers whilst distributing part of the equity risk of CBs to the equity market.Keywords: Hedge funds, Convertible Bonds, Convertible arbitrage, Supply, Risk Factors JEL classification: G10, G19, G23 1 IntroductionAt the turn of the century, capitalization of the global convertible bond ("CB") market stood at just under $300 billion while the US equity market was more than 50 times higher at over $1.5 trillion. Yet during the difficult market conditions between 2000 and 2002 (with events such as end to the dotcom bubble, September 11, and the accounting scandals at Worldcom and Enron), the new issues in both these markets were of similar orders of magnitude-close to $300 billion. Even during the financial crisis of [2007][2008], firms managed to raise about $118 billion in the US CB market. 1 This underscores the importance of the CB market as a source of capital for corporations during adverse economic conditions. 2To smooth the placement of such a large-scale issuance of CBs, economic agents willing to assume the inventory risk are clearly needed. Coincident to these macro events, the last decade has witnessed a rapid growth of convertible arbitrage ("CA 1 Equity data are from Federal Reserve Bulletin (various issues). We thank Jeff Wurgler for making it available on his website http://pages.stern.nyu.edu/~jwurgler/. CB estimate is from the public and private proceeds of convertible debt from Thomson Reuters Financial's SDC Platinum database, which we also use later on for our out-of-sample analysis. 2 Apart from being a useful source of liquidity to issuers during adverse market conditions, the issuance of CBs depends also on the costs and benefits compared to other forms of securities issuance. Firms selling CBs incur costs inclu...

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“…These discriminant functions provide a set of scores for each of the 17 styles. 3 Subsequently, the discriminant functions are used to determine the scores for the subsample of funds for which the appropriate style classi…cation is missing, after which each fund is allocated to its "most likely" style. While such a procedure necessarily is subject to classi…cation error, its within sample performance is rather well, with 52.3 % of the funds classi…ed correctly in one of 17 investment styles.…”

Section: ) On Average Each Fund Is Character-mentioning

confidence: 99%

Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance

Baquero¹,

Horst²,

Verbeek³

2005

J. Financ. Quant. Anal.

222

131

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In this paper we analyze the persistence in the performance of hedge funds taking into account look-ahead bias (multi-period sampling bias). To do so, we model liquidation of hedge funds and analyze how it depends upon historical performance. Next, we use a weighting procedure that eliminates look-ahead bias in measures for performance persistence. In contrast to earlier results for mutual funds, the impact of look-ahead bias is exacerbated for hedge funds due to their greater level of total risk. At the four quarter horizon, look-ahead bias can be as large as 3.8%, depending upon the decile of the distribution. At the quarterly level, we …nd positive persistence in hedge fund returns, also after correcting for investment style. The empirical pattern at the annual level is also consistent with positive persistence, but its statistical signi…cance is weak.

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Risks and Portfolio Decisions Involving Hedge Funds

Cited by 1,067 publications

References 36 publications

The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?

The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?

Risk and return in convertible arbitrage: Evidence from the convertible bond market

Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance

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