<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.

In dieser Dissertation wird die Hedgefonds-Industrie erstmals aus einer umfassenden Governanceperspektive betrachtet. Das Anreizgeflecht zwischen Hedgefonds und ihren wichtigsten Stakeholdern wird analysiert, um darzustellen, welche Interessenskonflikte zwischen Hedgefonds und ihren Stakeholdern, aber auch innerhalb der Stakeholdern-Society der Industrie existieren. Einige dieser Konflikte können das operative Risiko und somit die Kreditrisiken einzelner Fonds erhöhen und strahlen durch die verbreitete Intransparenz und die zunehmenden Ansteckungsgefahren innerhalb der Hedgefonds-Industrie auf weite Teile der Industrie ab. Diese Arbeit ergänzt die wissenschaftliche Literatur, indem erstmals die grundlegenden Interessenskonflikte der Hedgefonds-Industrie gegenüber ihren wichtigsten Stakeholdern (Investoren, Gläubigern & Gesellschaft) identifiziert, umfassend dargestellt und Lösungsansätze diskutiert werden. Zur Identifizierung und Analyse dieser grundlegenden Anreizprobleme und der daraus resultierenden Interessenskonflikte wird sich eines Datensatzes bedient, der bisher noch keine Behandlung in der wissenschaftlichen Literatur über Hedgefonds gefunden hat: Den Hedgefonds-Anklagen der U.S. Securities and Exchange Commission (SEC) zwischen den Jahren 2000 und 2011. Der Blick aus der Stakeholderperspektive ermöglicht es, die Anreize, denen ein Fondsmanager oder verschiedene Stakeholder ausgesetzt sein können, besser zu verstehen, zentrale Anreizprobleme der Industrie zu identifizieren und potenzielle Lösungsansätze vor dem Hintergrund der Governancetheorie zu diskutieren. Zudem wird der Zusammenhang zwischen den Governanceproblemen und den systemischen Risiken der Hedgefonds-Industrie hergestellt. Es wird gezeigt, dass verbesserte Governancestrukturen, die transparenzerhöhend und anreizangleichend wirken, nicht ausschließlich Investoren und Gläubigern, sondern auch der Gesellschaft als zentraler Stakeholder der Industrie einen Mehrwert bringen können. Denn die Governanceprobleme, die noch immer Teile der Hedgefonds-Industrie prägen, wie immer neue und größere Betrugsskandale andeuten, zeigen auch, dass sie aus einer Governance- beziehungsweise operativen Perspektive für ihre wachsende Rolle im Finanzsystem noch nicht gerüstet zu sein scheint. Diese operativen Risiken können die Kreditrisiken vieler Fonds erhöhen und negative Auswirkungen auf systemrelevante Gläubiger haben, die im Brokerage/Depotgeschäft den Risiken einer Vielzahl von Hedgefonds ausgesetzt sein können. Im Lauf der vergangenen Dekade hat zusätzlich noch die Vernetzung innerhalb der Hedgefonds-Industrie und mit systemrelevanten Institutionen zugenommen. Daher sind nicht mehr nur die Kreditrisiken großer Fonds, sondern durch potenzielle Ansteckungsgefahren innerhalb der Industrie werden auch die Kreditrisiken kleinerer Fonds relevant, wenn diese korreliert ausfallen. So können Governanceprobleme in der Hedgefonds-Industrie durch die Erhöhung des operativen und des Kreditrisikos die systemischen Risiken der Industrie beeinflussen. Daher können durch geeignete Governancemechanismen den einzelnen Stakeholdern, der Wissenschaft sowie der Politik grundlegende Informationen und Steuerungsinstrumente zugänglich gemacht werden, die die Mess- und Steuerbarkeit von operativen Risiken erhöhen, potenzieller Überregulierung besser vorbeugen und Kredit- und systemische Risiken abschwächen.

The goal of this Master's Thesis is to analyze the specific characteristics of the hedge funds with a primary focus on profitability and risk of the industry, which has experienced significant growth of the value of assets under management since the beginning of the new millennium. I want to provide a realistic point of view at the whole industry, which is considered as very risky in the eyes of the public. I want to support this point of view with an analysis of the risks and profitability of hedge funds. The single types of hedge funds are compared to each other and also to other asset classes. The first chapter discusses the specifics of hedge funds, so we can easily understand what differs them from the other collective investment funds. I have briefly described the development of the whole industry, which I have supported with graphical and numerical expression. The second chapter is focused on the development of regulation of hedge funds on the US market and on the European continent. The last chapter is dedicated to the analysis of the profitability and risk of hedge funds. The output of this part is the ideal hedge fund for the potential investor.

The diploma thesis focuses on the design of an investment portfolio for a hedge fund, which is focused on investments in technology companies. The selection of individual companies is based on a fundamental analysis and the statute of the hedge fund.

Firms that emerged from Chapter 11 as public companies have tons of characteristics. The first essay analyzes their post bankruptcy performance, duration effect, and the quality of their projection information. While the sample's post bankruptcy performance does show improvement, their projections tend to be optimistic. Firms with shorter durations in Chapter 11generally achieve better performance than those with longer durations, in terms of Z-scores, but not in excess returns. Compared to firms that did not provide (complete) projection information, the sample firms generally exhibit better improvement, as measured by Z-scores and short term excess returns. The second essay tracks the holding period return in investing in bankrupt stocks using a buy-and-hold strategy. Holding period return using stock price alone cannot show the entire story, as when considering final distributions plus the stock price, we see a much severe loss. In the regression analysis, the results reveal that liquidity is always a key factor in explaining the returns. Profitability and information uncertainty plays a significant role in explaining the positive returns, while liquidity and (un)profitability are the two key issues in negative returns. In addition, the involvement of hedge funds does not show signs of better stock performance. The third essay explores the role hedge funds play as investors in bankrupt firms. The results show that their major contributions are to provide liquidity for and help the troubled firms improve their profitability. Compared the performances in post bankruptcy to pre-bankruptcy level, bankrupt firms with hedge funds involvement tend to be in better shape compared to the ones without any vulture investments, however, firms with hedge fund show comparable results with the ones with other vulture investors, such as private equities. In addition, the above improvements only appear in the short run, and the involvement of hedge funds does not guarantee a better stock performance. Therefore, hedge funds are more of financial players, rather than strategic players, as hedge funds do not help the troubled firms go through a systematic restructuring to achieve sustainable improvements.

No description available.

This dissertation consists of two essays, both co-authored with Ugur Lel. The first essay (Chapter 1) examines whether high CEO pay inequality (CPI), the share of total managerial pay captured by the CEO, is an outcome of poor corporate governance, and its implications for shareholder wealth. We exploit the 2002 NYSE and NASDAQ governance reforms that mandated firms to have majority independent boards as a quasi-exogenous source of variation in the internal governance environment of firms. Results show that CPI decreases following the passage of these exchange listing regulations, but only in firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for these firms. These results are robust to a variety of robustness checks such as a matched sample analysis and placebo tests. Overall, our results suggest that poor governance environments are associated with high managerial pay differences and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment. The second essay (Chapter 2) examines whether shareholders use executive compensation channel to align managerial horizon with their investment horizon. We utilize a newly emerged empirical measure, pay duration, to measure managerial horizon. For shareholder horizon, we use the fraction of long-term institutional ownership in the firm. Results show that there is a positive association between long-term institutional ownership and CEO pay duration, suggesting that shareholder horizon is a determining factor in compensation contracts. We address reverse causality using indexer institutions. We also establish a causal link from investor horizon to CEO pay duration using institution mergers as a source of exogenous variation in investor horizon of the firm. We extend our results to hedge fund activism and document a negative relation between hedge fund activism and pay duration, which is consistent with our argument. Overall our results suggest that shareholders structure CEO pay in a way that is consistent with their investment horizon. / Ph. D. / CEOs play a crucial role in today’s financial world. They are the ultimate decision makers in companies and their goal is to maximize the shareholder wealth. Motivating the CEO to work hard and maximize shareholder wealth hinges on optimally designed compensation contracts. Shareholders delegate company directors to design these pay contracts. However, conflicts of interest between directors and CEOs, between shareholders and CEOs, and even among shareholders, affect the design of CEO pay contracts. It is important to study these conflicts of interest and their effect on CEO compensation to ensure well-functioning companies and a fair market. The objective of the first chapter is to examine whether the CEOs are overpaid when the company directors are not able to monitor the actions and decisions of the CEOs. We document that powerful and established CEOs are overpaid, both in dollar terms and relative to other managers in the company, when they are not properly monitored. We also document that regulations that aim to improve monitoring quality in companies bring CEO pay to fair levels, leading to an increase in company valuations. These findings point out the importance of regulations that improve the governance of companies. In the second chapter, we examine short-termism (or myopia) in the context of CEO pay. Basically, short-termism is any action that saves today but is costly in future. While short-term shareholders invest in companies for short periods to take advantage of temporary changes in company valuation, long-term investors invest for long periods and aim to benefit from long-term increase in company valuation. We document that the conflict of interest among shareholders with different investment periods is reflected in the design of CEO pay contracts. In particular, CEOs wait more to receive their compensation if the dominant investor type in the company has longer investment period. This finding explains how shareholders use CEO compensation to achieve wealth maximization, highlighting the power and importance of CEO pay contracts.

The research presented in this thesis addresses different aspects of dynamic portfolio construction and portfolio risk measurement. It brings the research on dynamic portfolio optimization, replicating portfolio construction, dynamic portfolio risk measurement and volatility forecast together. The overall aim of this research is threefold. First, it is aimed to examine the portfolio construction and risk measurement performance of a broad set of volatility forecast and portfolio optimization model. Second, in an effort to improve their forecast accuracy and portfolio construction performance, it is aimed to propose new models or new formulations to the available models. Third, in order to enhance the replication performance of hedge fund returns, it is aimed to introduce a replication approach that has the potential to be used in numerous applications, in investment management. In order to achieve these aims, Chapter 2 addresses risk measurement in dynamic portfolio construction. In this chapter, further evidence on the use of multivariate conditional volatility models in hedge fund risk measurement and portfolio allocation is provided by using monthly returns of hedge fund strategy indices for the period 1990 to 2009. Building on Giamouridis and Vrontos (2007), a broad set of multivariate GARCH models, as well as, the simpler exponentially weighted moving average (EWMA) estimator of RiskMetrics (1996) are considered. It is found that, while multivariate GARCH models provide some improvements in portfolio performance over static models, they are generally dominated by the EWMA model. In particular, in addition to providing a better risk-adjusted performance, the EWMA model leads to dynamic allocation strategies that have a substantially lower turnover and could therefore be expected to involve lower transaction costs. Moreover, it is shown that these results are robust across the low - volatility and high-volatility sub-periods. Chapter 3 addresses optimization in dynamic portfolio construction. In this chapter, the advantages of introducing alternative optimization frameworks over the mean-variance framework in constructing hedge fund portfolios for a fund of funds. Using monthly return data of hedge fund strategy indices for the period 1990 to 2011, the standard mean-variance approach is compared with approaches based on CVaR, CDaR and Omega, for both conservative and aggressive hedge fund investors. In order to estimate portfolio CVaR, CDaR and Omega, a semi-parametric approach is proposed, in which first the marginal density of each hedge fund index is modelled using extreme value theory and the joint density of hedge fund index returns is constructed using a copula-based approach. Then hedge fund returns from this joint density are simulated in order to compute CVaR, CDaR and Omega. The semi-parametric approach is compared with the standard, non-parametric approach, in which the quantiles of the marginal density of portfolio returns are estimated empirically and used to compute CVaR, CDaR and Omega. Two main findings are reported. The first is that CVaR-, CDaR- and Omega-based optimization offers a significant improvement in terms of risk-adjusted portfolio performance over mean-variance optimization. The second is that, for all three risk measures, semi-parametric estimation of the optimal portfolio offers a very significant improvement over non-parametric estimation. The results are robust to as the choice of target return and the estimation period. Chapter 4 searches for improvements in portfolio risk measurement by addressing volatility forecast. In this chapter, two new univariate Markov regime switching models based on intraday range are introduced. A regime switching conditional volatility model is combined with a robust measure of volatility based on intraday range, in a framework for volatility forecasting. This chapter proposes a one-factor and a two-factor model that combine useful properties of range, regime switching, nonlinear filtration, and GARCH frameworks. Any incremental improvement in the performance of volatility forecasting is searched for by employing regime switching in a conditional volatility setting with enhanced information content on true volatility. Weekly S&amp;P500 index data for 1982-2010 is used. Models are evaluated by using a number of volatility proxies, which approximate true integrated volatility. Forecast performance of the proposed models is compared to renowned return-based and range-based models, namely EWMA of Riskmetrics, hybrid EWMA of Harris and Yilmaz (2009), GARCH of Bollerslev (1988), CARR of Chou (2005), FIGARCH of Baillie et al. (1996) and MRSGARCH of Klaassen (2002). It is found that the proposed models produce more accurate out of sample forecasts, contain more information about true volatility and exhibit similar or better performance when used for value at risk comparison. Chapter 5 searches for improvements in risk measurement for a better dynamic portfolio construction. This chapter proposes multivariate versions of one and two factor MRSACR models introduced in the fourth chapter. In these models, useful properties of regime switching models, nonlinear filtration and range-based estimator are combined with a multivariate setting, based on static and dynamic correlation estimates. In comparing the out-of-sample forecast performance of these models, eminent return and range-based volatility models are employed as benchmark models. A hedge fund portfolio construction is conducted in order to investigate the out-of-sample portfolio performance of the proposed models. Also, the out-of-sample performance of each model is tested by using a number of statistical tests. In particular, a broad range of statistical tests and loss functions are utilized in evaluating the forecast performance of the variance covariance matrix of each portfolio. It is found that, in terms statistical test results, proposed models offer significant improvements in forecasting true volatility process, and, in terms of risk and return criteria employed, proposed models perform better than benchmark models. Proposed models construct hedge fund portfolios with higher risk-adjusted returns, lower tail risks, offer superior risk-return tradeoffs and better active management ratios. However, in most cases these improvements come at the expense of higher portfolio turnover and rebalancing expenses. Chapter 6 addresses the dynamic portfolio construction for a better hedge fund return replication and proposes a new approach. In this chapter, a method for hedge fund replication is proposed that uses a factor-based model supplemented with a series of risk and return constraints that implicitly target all the moments of the hedge fund return distribution. The approach is used to replicate the monthly returns of ten broad hedge fund strategy indices, using long-only positions in ten equity, bond, foreign exchange, and commodity indices, all of which can be traded using liquid, investible instruments such as futures, options and exchange traded funds. In out-of-sample tests, proposed approach provides an improvement over the pure factor-based model, offering a closer match to both the return performance and risk characteristics of the hedge fund strategy indices.

在投資無國界的全球化金融市場下，國際市場的開放與整合平台的建立，使國內投資人可選擇更多的金融工具。傳統的投資項目多為股票、債券或平衡型商品，在獲利狀況不甚理想下，便開始尋求其他國際的投資管道或是金融商品加入其資產配置中，希望獲取穩定的報酬下，又能降低所承擔的投資風險將投資所需承擔的風險減低。 近年避險基金的投資績效及資產規模成長搶眼，挾著法令寬鬆與靈活運用的操作策略，以及投資範疇廣與市場連動性低等特性，創造出日益壯大的規模。我國積極致力於金融改革，除了監督管理制度面的改善，對於新興金融工具的開放，也是國內投資環境必須跟進的方向。未來在台灣若能開放設立避險基金之前，國內投資人與監管機關所擔負職責，皆應該對此種金融工具有深入的認識。 本研究透過四個概念的架構，去評估避險基金加入投資組合後，是否可以幫助投資人達成降低風險以及增加報酬之目標，以及身為資產管理者如何將避險基金納入其資產配置決策等相關考量；對國內金融主管機關而言，避險基金的開放或是投資限制的放寬是否是正確的金融政策方向，才能配以完善的監理機制與法令規範，使國內投資大眾在投資理財工具上更加完備。 實證結果分析發現，在研究期間避險基金的確可以幫助投資組合之效益提升，但是加入總體情境時，其對投資組合的幫助卻不一致，只有在空頭期間的效果明顯。另外發現沒有避險基金相關之投資限制下的投資組合，其夏普指數高於有限制的投資組合；在避險基金限制放寬下，效率前緣往左上角移動，推論放寬避險基金限制該是正確的金融政策。最後，本研究也發現以機構投資法人而言，避險基金加入投資組合能幫助達到絕對報酬。 / Under the global financial market, which has broken the boundaries between nations, domestic investors now have more choices of financial instruments than they did before. Therefore, besides traditional domestic investment vehicles, such as stocks or mutual funds, domestic investors have started seeking other instruments to enhance their portfolio, pursuing better risk-return profile. In recent years, hedge fund’s performance and assets size have both grew impressively by capitalizing on deregulations and various trading strategies of its own. Besides the improvement in financial supervision system, deregulation and capitalizing on newly innovated financial instruments are also important to the reformation of Taiwan’s financial market. Before hedge funds can be legally raised in Taiwan, both domestic investors and market supervisors should equip themselves with adequate knowledge about this important instrument. By analyzing the four concepts in the third chapter, the research intends to evaluate whether investors can enjoy better risk-return profile by adding hedge funds into their portfolios. Also, the research objective is to provide suggestions to fund managers as they consider their assets allocation. Finally, we want to evaluate whether it is correct for Taiwan to open up to hedge funds, therefore the government can establish feasible supervision system to protect domestic investors’ rights. The research has found that hedge funds could indeed benefit the portfolio during the time period under consideration. However, hedge funds did not have significant effect on the portfolio as macroeconomic scenario was taken into consideration. In the scenario, hedge funds have significantly positive effect on the portfolio only under a bearing market. Furthermore, the research found that the portfolios with less limitation on hedge fund investment can enjoy better Sharp Ratios than those with striker limitation on hedge fund investment. Since the efficiency frontier moved upper left as we reduced the limitation on hedge fund investment in the research, we may conclude that an open-up to hedge funds should be the correct direction for our financial policy. At last, the research also found that institutional investors can get absolute return by adopting hedge funds in their portfolios.