Volume 54: Issue 3 (June 1999)

The Performance of Hedge Funds: Risk, Return, and Incentives

Pages: 833-874  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00129  |  Cited by: 707

Carl Ackermann, Richard McEnally, David Ravenscraft

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988–1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data‐conditioning biases is explored. We find evidence that positive and negative survival‐related biases offset each other.

Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance

Pages: 875-899  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00130  |  Cited by: 689

Judith Chevalier, Glenn Ellison

We examine whether mutual fund performance is related to characteristics of fund managers that may indicate ability, knowledge, or effort. In particular, we study the relationship between performance and the manager's age, the average composite SAT score at the manager's undergraduate institution, and whether the manager has an MBA. Although the raw data suggest striking return differences between managers with different characteristics, most of these can be explained by behavioral differences between managers and by selection biases. After adjusting for these, some performance differences remain. In particular, managers who attended higher‐SAT undergraduate institutions have systematically higher risk‐adjusted excess returns.

Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability

Pages: 901-933  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00131  |  Cited by: 523

Lu Zheng

A previous study finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that funds that receive more money subsequently perform significantly better than those that lose money. This effect is short‐lived and is largely but not completely explained by a strategy of betting on winners. In the aggregate, there is no significant evidence that funds that receive more money subsequently beat the market. However, it is possible to earn positive abnormal returns by using the cash flow information for small funds.

Investment Decisions Depend on Portfolio Disclosures

Pages: 935-952  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00132  |  Cited by: 141

David K. Musto

AbstractA weekly database of retail money fund portfolio statistics is uneconomical for retail investors to observe, so it allows direct comparison of disclosed and undisclosed portfolios. This makes possible a more direct and unambiguous test for “window dressing” than elsewhere in the literature. The analysis shows that funds allocating between government and private issues hold more in government issues around disclosures than at other times, consistent with the theory that intermediaries prefer to disclose safer portfolios. Cross‐sectional comparisons locate the most intense rebalancing in the worst recent performers.

Global Stock Markets in the Twentieth Century

Pages: 953-980  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00133  |  Cited by: 325

Philippe Jorion, William N. Goetzmann

AbstractLong‐term estimates of expected return on equities are typically derived from U.S. data only. There are reasons to suspect that these estimates are subject to survivorship, as the United States is arguably the most successful capitalist system in the world. We collect a database of capital appreciation indexes for 39 markets going back to the 1920s. For 1921 to 1996, U.S. equities had the highest real return of all countries, at 4.3 percent, versus a median of 0.8 percent for other countries. The high equity premium obtained for U.S. equities appears to be the exception rather than the rule.

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Pages: 981-1013  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00134  |  Cited by: 722

Stephen R. Foerster, G. Andrew Karolyi

Non‐U.S. firms cross‐listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.

The Persistence of IPO Mispricing and the Predictive Power of Flipping

Pages: 1015-1044  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00135  |  Cited by: 234

Laurie Krigman, Wayne H. Shaw, Kent L. Womack

AbstractThis paper examines underwriters' pricing errors and the information content of first‐day trading activity in IPOs. We show that first‐day winners continue to be winners over the first year, and first‐day dogs continue to be relative dogs. Exceptions are “extra‐hot” IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders “flip” IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional.

The Going‐Public Decision and the Development of Financial Markets

Pages: 1045-1082  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00136  |  Cited by: 612

Avanidhar Subrahmanyam, Sheridan Titman

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms generally depends on public market size, which implies that there can be a positive externality associated with going public, so that an inferior equilibrium can exist where too few firms go public. The model is consistent with empirical observations on financial market development.

Merging Markets

Pages: 1083-1107  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00137  |  Cited by: 86

Tom Arnold, Philip Hersch, J. Harold Mulherin, Jeffry Netter

AbstractWe study the causes and effects of the competition for order flow by U.S. regional stock exchanges. We trace the origins of competition for order flow to a change in the role of regional exchanges from being venues for listing local securities to being more direct competitors for the order flow of NYSE listings. We study the way regionals competed for order flow, concentrating on a series of stock‐exchange mergers that occurred in the midst of this transition of the regional exchanges. The merging exchanges attracted market share and experienced narrower bid‐ask spreads.

Evidence on the Determinants of Credit Terms Used in Interfirm Trade

Pages: 1109-1129  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00138  |  Cited by: 600

Chee K. Ng, Janet Kiholm Smith, Richard L. Smith

AbstractTrade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two‐part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.

A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View

Pages: 1131-1152  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00139  |  Cited by: 228

R. Glenn Hubbard, Darius Palia

AbstractOne possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less‐developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially “unconstrained” buyers acquire “constrained” targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company‐specific operational information, while the bidder provided capital‐budgeting expertise.

Ex Ante Bond Returns and the Liquidity Preference Hypothesis

Pages: 1153-1167  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00140  |  Cited by: 33

Jacob Boudoukh, Matthew Richardson, Tom Smith, Robert F. Whitelaw

We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant, even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.

Number of Shareholders and Stock Prices: Evidence from Japan

Pages: 1169-1184  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00141  |  Cited by: 152

Yakov Amihud, Haim Mendelson, Jun Uno

AbstractMerton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit—the number of shares in a “round lot”—which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.

Book Reviews

Pages: 1185-1189  |  Published: 6/1999  |  DOI: 10.1111/1540-6261.t01-1-00142  |  Cited by: 0

Book Reviews

Pages: 1185-1189  |  Published: 6/1999  |  DOI: 10.1111/1540-6261.00142  |  Cited by: 0

AbstractThe Mutual Fund Business. By ROBERT C. POZEN. Cambridge, MA: MIT Press, 1998. Pp. xiii + 712.Risk Management and Insurance. By SCOTT E. HARRINGTON and GREGORY R. NIEHAUS. Irwin/McGraw‐Hill, 1999. Pp. xxx + 674.

Miscellanea

Pages: 1191-1197  |  Published: 6/1999  |  DOI: 10.1111/0022-1082.00143  |  Cited by: 0