Yes / Based on a reduced-form model of credit risk, we explore mispricing in the CDS spreads of North American companies and its economic content. Specifically, we develop a trading strategy using the model to trade out of sample market-neutral portfolios across the term structure of CDS contracts. Our empirical results show that the trading strategy exhibits abnormally large returns, confirming the existence and persistence of a mispricing. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the mispricing is more pronounced when the market is more volatile. When implemented on the Markit data, the strategy shows significant economic value even after controlling for realistic transaction costs.

In questa tesi, l’analisi verte su risk-adjusted performance, proprietà statistiche e caratteristiche dei fondi hedge (FH). Nel primo articolo, i risultati relativi al survivorship bias e backfill bias indicano che l’impatto delle distorsioni è diverso a seconda delle strategie. Utilizzando il modello multifattoriale di Fung and Hsieh (2004), l’analisi della performance indica che il 42% dei FH ha ottenuto un rendimento superiore al mercato. Infine, utilizzando dei metodi parametrici e non parametrici, l’analisi della persistenza indica differenti livelli di persistenza a seconda della strategia. Nel secondo articolo, vengono analizzati i fondi di fondi hedge (FOHFs). I risultati sono particolarmente interessanti. In primo luogo, i FOHFs e le sotto strategie hanno generato un excess return positivo; inoltre l’alfa ottenuto attraverso il modello a 7 fattori di Fung and Hsieh (2004) risulta elevato. In secondo luogo, i FOHFs e le sotto strategie hanno un rendimento inferiore a quello dell’indice dei FH. In terzo luogo, le correlazioni tra gli indici dei FOHFs e l’indice azionario sono inferiori rispetto alle correlazioni tra l’indice dei FH e gli indici azionari. Infine, l’indice dei FH e quelli dei FOHFs sono positivamente correlati con l’indice azionario quando il mercato tende al ribasso, ma risultano non correlati con l’indice azionario quando il mercato tende al rialzo. Rispetto all’indice dei FH, gli indici dei FOHFs hanno una correlazione minore con gli indici azionari in entrambe le fasi del mercato, suggerendo che i FOHFs forniscono benefici maggiori in termini di diversificazione rispetto ai fondi hedge puri. / In this thesis, I examine the risk-adjusted performance, statistical properties and fund characteristics of hedge fund investments. In Essay One, results of survivorship bias and backfill bias by investment styles indicate that biases are different across styles. Using a multi-factor model of Fung and Hsieh (2004), the analysis of performance indicates that 42% of the hedge funds significantly outperformed the market. Finally, using parametric and non-parametric methods, the analysis of persistence indicates different degree of persistence depending on the hedge fund strategy. In Essay Two, I analyse fund of hedge funds (FOHFs). I find several interesting results. First, FOHFs and the sub-strategies earn positive excess returns and a high Fung and Hsieh 7-factor alpha. Second, FOHFs and the sub-strategies underperform the hedge fund index (HFI). Third, the correlations between FOHF indices and equity index are lower than correlations between HFI and equity indices. Finally, hedge funds and FOHFs are positively correlated with the equity index in the bear markets but uncorrelated with the equity index in the bull markets. Compared to HFI, FOHF indices have lower correlation with equity index in both bull and bear markets, indicating that FOHFs provide better diversification benefits than individual hedge funds.

Submitted by Alice Singer (lilicasinger@gmail.com) on 2013-02-27T16:25:59Z No. of bitstreams: 1 Dissertacao_Alice.pdf: 1210322 bytes, checksum: a587136246bce1145c8096d499e28342 (MD5) / Approved for entry into archive by Eliene Soares da Silva (eliene.silva@fgv.br) on 2013-02-27T16:28:28Z (GMT) No. of bitstreams: 1 Dissertacao_Alice.pdf: 1210322 bytes, checksum: a587136246bce1145c8096d499e28342 (MD5) / Made available in DSpace on 2013-02-27T16:33:15Z (GMT). No. of bitstreams: 1 Dissertacao_Alice.pdf: 1210322 bytes, checksum: a587136246bce1145c8096d499e28342 (MD5) Previous issue date: 2013-01-31 / Esse estudo foi motivado pela falta de bons fundos de investimento multimercado abertos para captação no Brasil e tem como objetivo analisar a viabilidade de utilizar a análise de estilo baseada em retorno para clonar retornos e comportamento de determinados fundos de investimento multimercado do mercado brasileiro. Modelos já testados no exterior e no Brasil foram pesquisados e optou-se por adaptar o modelo linear proposto por LIMA e VICENTE (2007). Verificou-se que o modelo de espaço de estados é mais adequado para clonar retornos de determinados fundos de investimento do que o modelo de regressão com parâmetros fixos. Resultados animadores foram obtidos para quatro dos cinco fundos analisados nesse estudo. / This work was motivated by the lack of hedge funds opened for new investments in Brazil and it aims to analyze the feasibility of using the style analyses to clone returns and behavior of certain Brazilian hedge funds. Models already tested abroad and in Brazil were investigated and it was decided to adapt the linear model proposed by LIMA and VICENTE (2007). It was found that the state space model is more suitable for cloning returns of certain hedge funds than fixed parameters regression models. Encouraging results were obtained for four of the five funds analyzed in this study.

Over the past years, the total assets under management among hedge funds and equity mutual fundshave increased significantly. The question from an investor point of view iswhich investment vehicle can provide the greatest return adjusted for risk. The purpose of this study involves an analysis on the historical net asset values todetermine and evaluate what one can except from actively managed hedge andequity mutual funds. It supports the determination of the most profitable asset, adjusted for risk, as part of a diversified portfolio. The performance is measured net of fees and costs with the inclusion of potential performance fees individual hedge funds may apply. Hedge funds practice different investment approaches depending on what strategy is applied and hence, return levels can vary dramatically. The study is designed to answer questions by comparing net returns and risk-adjusted returns for respective investments and the different hedge fund strategies. With a deductive research approach, the analysis is conducted by applying existing models and theories as the Fama-French three-factor model through time-series regressions measuring excess returns (alpha), risk-adjusted performance measures as Sharpe ratio, M-squared and the Sortino ratio. The results show that hedge funds outperform equity mutual funds in all examined aspects and produce positive monthly net alphas,on average. Equity mutual funds are unable to provide investors with positive excess returns and subsequently fail the purpose of an actively managed fund by providing returns lower than the return of the market. The results are increasingly strengthened with both time-series regressions and performance measures showing homogenous results and reaching the equal conclusions. From the conclusions that hedge funds provide the most profitable investment compared to equity mutual funds, the hedge fund strategy CTA/managed futures strategies perform best in both net and risk-adjusted terms.

This thesis consists of three chapters and investigates the issues related to liquidity risk, credit market contagion, and corporate cash holdings. The first chapter is coauthored work with Professor Jay Sa-Aadu and Associate Professor Ashish Tiwari and is titled ‘Market Liquidity, Funding Liquidity, and Hedge Fund Performance.’ The second chapter is sole-authored and is titled ‘Credit Market Contagion and Liquidity Shocks.’ The third chapter is coauthored with Steven Savoy and titled ‘Ambiguity Aversion and Corporate Cash Holdings.’ The first chapter examines the interaction between hedge funds’ performance and their market liquidity risk and funding liquidity risk. Using a 2-state Markov regime switching model we identify regimes with low and high market-wide liquidity. While funds with high market liquidity risk exposures earn a premium in the high liquidity regime, this premium vanishes in the low liquidity states. Moreover, funding liquidity risk, measured by the sensitivity of a hedge fund’s return to the Treasury-Eurodollar (TED) spread, is an important determinant of fund performance. Hedge funds with high loadings on the TED spread underperform low-loading funds by about 0.49% (10.98%) annually in the high (low) liquidity regime, during 1994-2012. The second chapter provides evidence on credit market contagion using CDS index data and identifies the channels through which contagion propagates in credit markets. The results show that funding liquidity and market liquidity are significant channels of contagion during periods with widening credit spreads and adverse liquidity shocks. These results provide support for the theoretical model proposed by Brunnermeier and Pedersen (2009) according to which negative liquidity spirals can lead to contagion across various asset classes. Furthermore, during periods with tightening credit spreads and positive liquidity shocks, the results indicate that a prime broker index and a bank index are important channels contributing to co-movement in credit spreads. This suggests that financial intermediaries play an important role in spreading market rallies across credit markets. The third chapter investigates the link between investors’ ambiguity aversion and precautionary corporate cash holdings. Investors’ ambiguity aversion is measured by the proportion of individual investors in a firm’s investor base who are hypothesized to be more ambiguity averse compared to institutional investors. We show that the value of cash holdings is negatively associated with the extent of ambiguity aversion in a firm’s shareholder base for firms that are financially constrained. Our results also show that financially constrained firms with a higher proportion of ambiguity averse investors hold less cash. These results provide support for models in which ambiguity averse investors dislike the cash holdings of firms, that are held for precautionary reasons to fund long term projects, given that the returns on long term projects are ambiguous.

Hedge funds and China’s stock market: a study on factors influencing investment decisions by fund managersThe research was conducted using a web-based questionnaire sent to all Asia-related hedge funds, worldwide. Analysis of the collected data revealed that the factors influencing the portfolio investments made in China by fund managers differed from the factors which influence investment in global and emerging markets. While market conditions, market timing and changes in earning estimates are the top three influencing factors on investment decisions on global stock exchanges, fund managers are more influenced by global trend, potential growth and company size when dealing with China’s stock market. Research results also support the hypotheses that there are relationships between size of fund, trading style and personal expertise of managers and the factors influencing investment decisions.The international hedge fund industry and China’s stock market are two fast-growing entities of global capital markets. Stronger interaction between these two institutions in the future would create important implications for the financial world. The objective of this research is to identify factors that influence investment decisions by hedge fund managers in relation to China’s stock market.The following implications can be extracted from this research:(1) If China’s stock market is classified within the Emerging Markets Index, adjustments are necessary and provision should be made reflecting investor criteria for China.(2) Global trends and the potential growth of China were the two most attractive factors influencing investment decisions, suggesting a ‘herding’ tendency and ‘attention-grabbing’ bias of hedge fund managers.(3) Company evaluation remains important to hedge fund managers, suggesting that Chinese government regulators should implement reforms to improve quality of listed firms.(4) Gaps in the research on China’s stock market as well as the outcomes of this research indicate that further studies on the international hedge fund industry and China’s stock market could reveal new perspectives and enhancements to the current body of knowledge on these subjects. This thesis consists of six chapters. Chapter 1 provides an overview of the research context and research justification. The research problem and questions are identified, and the theoretical framework and hypotheses are constructed. Chapter 2 presents an overview of the hedge fund industry and China’s stock market. Chapter 3 examines the literature: factors that influence investment decisions in global, emerging markets and in particular, China’s stock market. A framework of an 8-step decision-making process was developed. Chapter 4 researches alternative methodologies and presents a justification for the selection of the research methodology. Chapter 5 summarises the results of the data analysis and interpretation. Chapter 6 discusses the conclusions, implications, contributions and limitations of the research. Recommendations for further research are also included.The outcomes of this research are expected to benefit all participants of the global financial industry, including institutional and individual investors; executives in banking, insurance and securities businesses; financiers of listed firms and multinational corporations; government regulators and independent research analysts. Other beneficiaries will be academics and the media.

<p>The purpose of the thesis has been to explore the use of hedge fund styles when constructing portfolios of hedge funds (i.e. funds of hedge funds). The central question is if the use of hedge fund styles can significantly explain and improve risk adjusted returns (characterized by Sharpe ratios). The study has been done in collaboration with Optimized Portfolio Management AB who desire further knowledge and evaluation of hedge fund styles for their fund of hedge funds.</p><p>To be able to create successful ex ante portfolios we have explored various prediction models for both risk and return. Our findings indicate that return prediction is problematic using simple models such as regression since the risk exposure of the indices appear to change significantly over time. One can however using exponentially weighted moving averages (EWMA) achieve relatively promising estimations of future returns. </p><p>Covariance matrix estimation seems to be more straightforward. We have achieved promising results using both traditional EWMA models as well as improved estimators using principal component analysis.Covariance prediction models were evaluated separately using a minimum-variance portfolio optimization technique and provided a significant risk reduction compared to the aggregated hedge fund universe (represented by a naively diversified portfolio). Combinations of risk and return prediction models were evaluated using traditional mean-variance portfolio construction methods, which were optimized for Sharpe ratios. These provided a significant increase in risk adjusted returns relative to the aggregated hedge fund universe. The allocation is however discouraging due to serious instability over time.</p><p>Our findings indicate that there indeed is an advantage of taking hedge fund styles into consideration when constructing funds of hedge funds in a risk adjusted perspective. However, further research into return prediction needs to be done in order to stabilize portfolio allocation. An alternative seems to be tactical style allocation on a more fundamental analysis basis.</p>

The purpose of the thesis has been to explore the use of hedge fund styles when constructing portfolios of hedge funds (i.e. funds of hedge funds). The central question is if the use of hedge fund styles can significantly explain and improve risk adjusted returns (characterized by Sharpe ratios). The study has been done in collaboration with Optimized Portfolio Management AB who desire further knowledge and evaluation of hedge fund styles for their fund of hedge funds. To be able to create successful ex ante portfolios we have explored various prediction models for both risk and return. Our findings indicate that return prediction is problematic using simple models such as regression since the risk exposure of the indices appear to change significantly over time. One can however using exponentially weighted moving averages (EWMA) achieve relatively promising estimations of future returns. Covariance matrix estimation seems to be more straightforward. We have achieved promising results using both traditional EWMA models as well as improved estimators using principal component analysis.Covariance prediction models were evaluated separately using a minimum-variance portfolio optimization technique and provided a significant risk reduction compared to the aggregated hedge fund universe (represented by a naively diversified portfolio). Combinations of risk and return prediction models were evaluated using traditional mean-variance portfolio construction methods, which were optimized for Sharpe ratios. These provided a significant increase in risk adjusted returns relative to the aggregated hedge fund universe. The allocation is however discouraging due to serious instability over time. Our findings indicate that there indeed is an advantage of taking hedge fund styles into consideration when constructing funds of hedge funds in a risk adjusted perspective. However, further research into return prediction needs to be done in order to stabilize portfolio allocation. An alternative seems to be tactical style allocation on a more fundamental analysis basis.

Ce travail de thèse s'intéresse à la contribution des investisseurs sophistiqués de type hedge funds à la dynamique des marchés financiers. Considérant qu'ils sont les acteurs fondamentaux de la révélation des prix et de la liquidité des marchés, tant du point de vue du modèle standard que des critiques comportementalistes, on propose une évaluation des interdépendances dynamiques entre stratégies de gestion alternative et marchés financiers. Les trois premiers chapitres proposent, aumoyen d'approches économétriques originales, la mise en perspective des stratégies de hedge funds avec la dynamique des marchés à travers l'étude des rendements, de la volatilité et des co-volatilités. S'appuyant sur un large panel de résultats, l'étude révèle les nombreuses causalités croisées entre fonds et marchés, offrant à la finance comportementale des éléments de preuves empiriques des interactions qu'elle envisage au regard des excès de volatilité ou de la contagion financière. Riche de ces enseignements, le dernier chapitre propose enfin un retour aux modèles théoriques d'équilibres de marché pour proposer un portrait contrasté de la spéculation rationnelle dans sa relation à l'efficience des marchés.

Hedge funds and China’s stock market: a study on factors influencing investment decisions by fund managersThe research was conducted using a web-based questionnaire sent to all Asia-related hedge funds, worldwide. Analysis of the collected data revealed that the factors influencing the portfolio investments made in China by fund managers differed from the factors which influence investment in global and emerging markets. While market conditions, market timing and changes in earning estimates are the top three influencing factors on investment decisions on global stock exchanges, fund managers are more influenced by global trend, potential growth and company size when dealing with China’s stock market. Research results also support the hypotheses that there are relationships between size of fund, trading style and personal expertise of managers and the factors influencing investment decisions.The international hedge fund industry and China’s stock market are two fast-growing entities of global capital markets. Stronger interaction between these two institutions in the future would create important implications for the financial world. The objective of this research is to identify factors that influence investment decisions by hedge fund managers in relation to China’s stock market.The following implications can be extracted from this research:(1) If China’s stock market is classified within the Emerging Markets Index, adjustments are necessary and provision should be made reflecting investor criteria for China.(2) Global trends and the potential growth of China were the two most attractive factors influencing investment decisions, suggesting a ‘herding’ tendency and ‘attention-grabbing’ bias of hedge fund managers.(3) Company evaluation remains important to hedge fund managers, suggesting that Chinese government regulators should implement reforms to improve quality of listed firms.(4) Gaps in the research on China’s stock market as well as the outcomes of this research indicate that further studies on the international hedge fund industry and China’s stock market could reveal new perspectives and enhancements to the current body of knowledge on these subjects. This thesis consists of six chapters. Chapter 1 provides an overview of the research context and research justification. The research problem and questions are identified, and the theoretical framework and hypotheses are constructed. Chapter 2 presents an overview of the hedge fund industry and China’s stock market. Chapter 3 examines the literature: factors that influence investment decisions in global, emerging markets and in particular, China’s stock market. A framework of an 8-step decision-making process was developed. Chapter 4 researches alternative methodologies and presents a justification for the selection of the research methodology. Chapter 5 summarises the results of the data analysis and interpretation. Chapter 6 discusses the conclusions, implications, contributions and limitations of the research. Recommendations for further research are also included.The outcomes of this research are expected to benefit all participants of the global financial industry, including institutional and individual investors; executives in banking, insurance and securities businesses; financiers of listed firms and multinational corporations; government regulators and independent research analysts. Other beneficiaries will be academics and the media.