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Funds investing in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth these funds' returns when evaluating their risk exposures. We show that funds with similar investments share a common source of spurious autocorrelation not fully resolved by traditional unsmoothing methods and thereby leading to underestimation of systematic risk. Thus, we propose a generalized unsmoothing technique and apply it to hedge funds and private commercial real estate funds. Our method significantly improves the measurement of funds' risk exposures and risk-adjusted performance, especially for highly illiquid funds. Overall, the average illiquid fund alpha is lower than previously thought. (JEL G11, G12, G23) [ABSTRACT FROM AUTHOR]

We analyze a model in which an anomaly is unknown to arbitrageurs until its discovery, and test the model implications on both asset prices and arbitrageurs' trading activities. Using data on 99 anomalies documented in the existing literature, we find that the discovery of an anomaly reduces the correlation between the returns of its decile-1 and decile-10 portfolios. This discovery effect is stronger if the aggregate wealth of hedge funds is more volatile. Finally, hedge funds increase (reverse) their positions in exploiting anomalies when their aggregate wealth increases (decreases), further suggesting that these discovery effects operate through arbitrage trading. [ABSTRACT FROM AUTHOR]

The number of short campaigns by hedge funds has dramatically increased over the last two decades. Nearly 80% of campaigns are undertaken by activist hedge funds, particularly those that employ hostile tactics in their long campaigns. Short campaigns are associated with negative abnormal returns of –7%, with aggregate valuation effects similar in magnitude to the gains from long activism campaigns. In contrast to long campaigns, public communication is a critical component of short campaigns. We do not find evidence that such communication is manipulative. Overall, our analysis highlights the importance of short campaigns for understanding the economic impact of activist hedge funds. [ABSTRACT FROM AUTHOR]

Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online [ABSTRACT FROM AUTHOR]

This article empirically analyzes the impact of hedge fund activism on audit quality in emerging markets represented by China. It is found that hedge fund holding can significantly improve the audit quality of listed companies, but the above-mentioned effect is limited to private enterprises and companies with dispersed equity, yet not significant in state-owned enterprises (SOEs) and companies with concentrated equity. In addition, hedge fund activism becomes more prominent when auditors and analysts fail to play a governance role. Further tests show hedge funds influence audit quality through certain activism campaigns. We also use instrumental variable (IV) and propensity score matching method (PSM) to alleviate the endogeneity problem. The conclusion of this article contributes empirical evidence from emerging markets to the controversial topic of hedge fund activism. [ABSTRACT FROM AUTHOR]

The existing literature on finance, debt, and inequality depicts economic elites as a creditor class. According to a popular thesis, over the past four decades, the rich and ultra-rich households have experienced a saving glut (excess income), which they have invested in the debts of the poor and their governments. While it is undeniable that the rich have expanded their income share at the expenses of the poor, to refer to them as 'creditors' or 'lenders' is a misrepresentation of how they actually expand their wealth and income shares by financial means. For it conceals the fact that a great deal of their investments is leveraged, that is, carried out with borrowed money. This article shows that the debts generated for the sake of affluent households easily surpass those of all other households. However, these debts are not accounted for in statistics on household debt. This is because affluent households, particularly multi-millionaires and billionaires inside the top 1%, do not simply borrow from banks, like normal households do, but they are instead absentee debtors who borrow through corporate structures of which they are dominant shareholders and ultimate beneficiaries. To gain an insight into their invisible leverage, the article looks at how much hedge funds borrow and why their leverage matters. [ABSTRACT FROM AUTHOR]

This article is an interview with Clifford S. Asness, the founder of AQR Capital Management, LLC. Asness discusses his firm's investment strategy, which is based on economic theory and supported by statistical evidence. He emphasizes the need for a disciplined approach to investing and avoiding data mining. Asness also highlights the key performance indicators he prioritizes, such as separating alpha from beta and focusing on risk-adjusted returns. He discusses the role of risk management and technology in asset management strategies. Finally, he addresses the challenge of balancing client expectations with market dynamics and investment performance. Asness also discusses the importance of sharing research and insights with investors, the influence of environmental, social, and governance (ESG) factors on investment strategies, and the impact of global economic trends on investment decisions. He emphasizes the importance of diversification to mitigate risk and reflects on his experiences that have shaped his approach to investment management. He offers advice to aspiring Chief Investment Officers (CIOs), emphasizing the role of luck and the importance of learning from challenging times. [Extracted from the article]

While it is established that idiosyncratic volatility is negatively priced in the cross-section of stock returns, the relation between idiosyncratic volatility and hedge fund returns is largely unexplored. We document that hedge funds with high idiosyncratic volatility earn higher future risk-adjusted returns of 6 percent p.a. than hedge funds with low idiosyncratic volatility. The outperformance arises because hedge funds trade high idiosyncratic volatility stocks wisely. They pick high volatility stocks when they are underpriced and short-sell high volatility stocks when they are overpriced. Our results support the notion that hedge funds' idiosyncratic volatility is a measure of managerial skill. [ABSTRACT FROM AUTHOR]

Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors. [ABSTRACT FROM AUTHOR]

We examine whether estimates of hedge fund performance reported in prior empirical research are affected by publication bias. Using a sample of 1019 intercept terms from regressions of hedge fund returns on risk factors (the "alphas") collected from 74 studies published between 2001 and 2021, we show that the selective publication of empirical results does not significantly contaminate inferences about hedge fund returns. Most of our monthly alpha estimates adjusted for the (small) bias fall within a relatively narrow range of 30–40 basis points, indicating positive abnormal returns of hedge funds: Hedge funds generate money for investors. Studies that explicitly control for potential biases in the underlying data (e.g., backfilling and survivorship biases) report lower but still positive alphas. Our results demonstrate that despite the prevalence of publication selection bias in many other research settings, publication may not be selective when there is no strong a priori theoretical prediction about the sign of the estimated coefficients. [ABSTRACT FROM AUTHOR]

We examine the impact of hedge fund activism (HFA) on the investment efficiency of target firms. We find that target firms' investment efficiency improves after the active involvement of hedge funds. This improvement is mainly evident for HFA campaigns with investment strategy-related reforms as one of the main stated objectives. Among investment strategy-related HFA campaigns, the changes in investment efficiency are more pronounced when hedge funds obtain board representation or privately settle with target firms. HFA improves the investment efficiency of target firms by mitigating overinvestment rather than underinvestment problems. Additional tests reveal that target firms with no resistance to HFA and higher free cash flow accommodate this improvement in investment efficiency following HFA. Overall, our findings highlight the role of HFA as a governance mechanism in improving investment efficiency and influencing managers to reduce overinvestment. [ABSTRACT FROM AUTHOR]

This paper proposes a predictive approach to forecast future hedge fund performances and reporting stops to a commercial database within a subsequent year. We found that gradient boosting of decision trees is well suited to make a prognosis about the future development and reporting stops of hedge funds. The derived models are trained and evaluated using a panel of 5,592 individual hedge funds. We rank the impact of 22 variables that are computed out of hedge fund reporting (micro variables) and three different market environments (macro variables) on the predictability of hedge fund performance. In this way, we show the economic reasonability of the computed models and demonstrate the superiority of statistical learning algorithms. [ABSTRACT FROM AUTHOR]

We propose and test a framework of private information acquisition and decision timing for asset allocators hiring outside investment managers. Using unique data on due diligence interactions between an institutional allocator and 860 hedge fund managers, we find that the production of private information complements public information. The allocator strategically chooses how much proprietary information to collect, reducing due diligence time by 18 months and improving outcomes. Funds selected by the manager outperform those not selected by 9 |$\%$| over 20 months. The outperformance relates to the allocator learning about fund return-to-scale constraints and manager skill before other investors. [ABSTRACT FROM AUTHOR]

This study examines the role of market disagreement in explaining the cross‐section of hedge fund performance. In a market where disagreement fluctuates, skilled arbitrageurs may employ trading strategies to exploit the mispricing caused by disagreement and short‐sale constraints. Skilled hedge funds with high sensitivity to disagreement can take advantage of mispricing in high‐disagreement periods to improve their performance. We show that hedge funds with a high disagreement beta tend to possess skill in exploiting disagreement and, as such, they can earn higher cross‐sectional returns compared to other hedge funds lacking this skill. Existing risk factors and a tradable disagreement factor do not fully explain the difference in hedge fund performance between those with high and low disagreement betas. Further evidence shows that experienced hedge funds and hedge funds that charge a high incentive fee are likely to have high disagreement betas. Our empirical findings are robust in using various disagreement measures and methodologies to estimate disagreement beta. [ABSTRACT FROM AUTHOR]

We contrast the investment strategies of hedge funds and mutual funds around mergers and acquisitions (M&A). We find that hedge funds, on average, increase their holdings of soon‐to‐be takeover targets by 7.5% during the quarter before M&A announcements. Conversely, mutual funds, on average, reduce their equity holdings in impending targets by 3.0% over the same time period. The reduction in M&A holdings by mutual funds is less pronounced for more actively managed funds. Our results suggest that hedge funds enjoy superior access to private information or possess superior ability to process public information related to M&A transactions. [ABSTRACT FROM AUTHOR]

The study examines the relationship and linkages between spot and future prices of European Union Emission Trading Systems (EU-ETS) during 2019–2021. Dynamic conditional correlation specification of multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model was employed to examine the time-varying correlation between spot and future prices. Also, vector autoregression mean model and MGARCH-Baba-Engle-Kroner-Kraft volatility model was jointly estimated to model the spillover between EU ETS spot and future prices in the first and second moments. Lastly, we utilize the variance-covariance matrix of joint mean-variance model estimation to derive the optimal conditional hedge ratio as well as the hedge effectiveness of EU ETS future contracts. Our findings reveal a high conditional correlation and significant spillover between carbon spot and future markets in EU. Further, our study uncovers a high degree of hedge effectiveness for EU ETS future contracts. This is possibly the first study that examines the linkages between EU ETS spot and future prices pertaining to the recent transition stage of phase III and the initial stage of ongoing phase IV of the ETS market. Our findings pinpoint to ETS markets becoming more complete and in turn offering optimal hedging avenues. JEL Codes: G15, C58, Q38 [ABSTRACT FROM AUTHOR]

Hedge fund managers' risk-taking choices are influenced by their compensation structure. We differ from most studies that focus on incentive fees and the high-water mark by examining how management fees affect managers' risk-taking. Our simple model shows that managers' risk-taking is negatively related to their future management fees. Using fund-level data, we find that future management fees are the dominant component of managers' total compensation. When the contribution of future management fees increases, managers reduce risk-taking to increase survival probabilities. Moreover, funds with higher decreasing returns to scale are more sensitive to future management fees and reduce risk-taking even more. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

The article provides understanding of the effect of carried interest provisions on fairness and equality in the taxation of hedge fund profits. Topics discussed include foundational principles of the U.S. tax system, beneficiaries of the carried interest tax provisions, public and congressional response to the tax treatment of carried interest, taxation of carried interest as ordinary income and limitation of carried interest earned on domestic investments if it is taxed at capital gains rate.

We examine the impact of activist hedge fund campaigns on corporate Intangible Capital (IC) investments, a key determinant of corporate long-term growth and performance. We document that post-activist campaigns, targeted firms reduce IC investments by more than 10% compared to carefully matched non-target firms. In cross-sectional analyses, we observe the largest effects in less competitive industries, for older target firms and for firms with high financial constraints suggesting that IC cuts are more common in low-discipline and low-barriers-to-invest contexts. Hedge funds are cutting down IC investments when they engage both in relatively short and longer interventions but especially so when they have less industry investment experience. Further, we do not find evidence of post-intervention increased investment efficiency in targeted firms, casting some doubt on the longer-term value-added of activist IC slashing campaigns. Finally, in an attempt to identify where the saved IC resources post intervention flow to, we observe that targeted firms increase corporate payouts and prefer share repurchase programs above cash dividends. [ABSTRACT FROM AUTHOR]

Purpose: Applying the concept of "entrepreneur managers" from dynamic capabilities theory to the question of how some Japanese managers develop and use their relationships with foreign investors, this article explores organizational contexts in which Japanese managers use foreign shareholders as resources to enhance firm capabilities in the global marketplace, deploy assets effectively and implement changes to traditional organizational customs. The article asks why and how some top managers implemented institutional changes and adopted customs that are common in the shareholder-based system while others did not. Design/methodology/approach: We conducted qualitative interviews with 11 inverstor relations (IR) managers of large, listed Japanese firms in Kyoto and Tokyo. Findings: First, by inviting a hedge fund partner and using their human capital and social capital, a Japanese CEO committed to strengthening his firm's competencies in the global market and introduced changes that are common in the shareholder-based system. Second, a CEO with an MBA degree and exceptional communication skills in English and Japanese dedicated himself to executing much of the strategic advice suggested to him by foreign shareholders and altered some of his firm's traditional Japanese management practices. Third, even though many Japanese firms welcomed and used foreign shareholders as advisors to help them streamline and/or acquire firm assets, their top leaders' implementation of organizational changes was limited. Fourth, the top leaders of family-owned firms were reluctant to initiate dialogue with foreign investors. Originality/value: This article adds some useful organizational context to existing scholarship on institutional theory by examining Japanese leaders' strategic management in their relations with foreign investors. Using the concept of dynamic capabilities, it addresses the role of innovative strategic managers in firms' institutional changes. [ABSTRACT FROM AUTHOR]

Research Summary: This article examines the antecedents and outcomes of hedge fund activism in family versus nonfamily firms. We find that activist hedge funds are less likely to initiate campaigns against family firms than nonfamily firms, but the cumulative abnormal returns to announcements of campaigns against family firms exceed those of nonfamily firms. The presence of one or more family members on a firm's board of directors appears to be a key impediment to hedge fund activism in family firms. Additionally, activist hedge funds are more likely to use hostile tactics and demand more substantive changes in their campaigns against family firms than nonfamily firms. Together, these findings contribute to the agency theory‐based literatures on hedge fund activism, family firms, boards of directors, and corporate governance. Managerial Summary: Activist hedge funds are a significant force in corporate governance, driving the companies they target to change their strategies, structures, and leadership. Family firms are prevalent and economically important, accounting for a third to a half of companies worldwide. This article compares hedge fund activism in family versus nonfamily firms. Activist hedge funds are about 41% less likely to initiate campaigns against family than nonfamily firms, but the average returns to successful activist hedge fund campaigns against family firms are about 2% higher than in nonfamily firms. These effects are especially pronounced when family members serve on a company's board of directors. Furthermore, activist hedge funds are more likely to use hostile tactics and demand more substantive changes in campaigns against family than nonfamily firms. [ABSTRACT FROM AUTHOR]

Using monthly data from 1997 to 2023, we construct mean-variance optimized portfolios of common university endowment asset classes, including domestic equity, international equity, global bonds, hedge funds, private equity, real estate, and natural resources. We find substantial variation in optimal allocations to these asset classes across subperiods. Some asset classes are substantially more persistent in receiving allocations than others, while some asset classes rarely receive sizable allocations at all. Our results highlight the relevance of asset allocation in portfolio performance and may inform future decisions by institutional investors and endowment portfolio managers. [ABSTRACT FROM AUTHOR]

The theory of neutrosophic hypersoft set (NHSS) is an appropriate extension of the neutrosophic soft set to precisely measure the uncertainty, anxiety, and deficiencies in decision-making and is a parameterized family that handles sub-attributes of the parameters. In contrast to recent studies, NHSS could accommodate more uncertainty, which is the essential procedures to describe fuzzy data in the decision-making method. Hedge funds are financial funds, finance institutions that increase funds from stockholders and accomplish them. Usually, they try to make certain predictions and work with the time sequence dataset. A hedge fund is heterogeneous in its investment strategies and invests in a different resource class with various return features. Furthermore, hedge fund strategy is idiosyncratic and proprietary to the hedge fund manager, and the correct skills of fund managers are not visible to the stockholders. These reasons, united, make hedge fund selection a complex task for the stockholders. Different techniques have been analyzed to select the portfolio of hedge funds for investment. Machine-learning (ML) models employed used for performing individual hedge fund selection within hedge fund style classifications and forecasting hedge fund returns. Therefore, this study designs a new Single Valued Neutrosophic Hypersoft Set VIKOR Model for Hedge Fund Return Prediction (SVNHSS-HFRP) technique. The presented SVNHSSHFRP technique aims to forecast the hedge fund returns proficiently. In the SVNHSS-HFRP technique, two stages of operations are involved. At the initial stage, the SVNHSS-HFRP technique, the SVNHSS is used for forecasting the hedge funds. Next, in the second stage, the moth flame optimization (MFO) system is applied to optimally choose the parameter values of the SVNHSS model. The performance validation of the SVNHSS-HFRP model is verified on a benchmark dataset. The experimental values highlighted that the SVNHSS-HFRP technique reaches better performance than existing techniques. [ABSTRACT FROM AUTHOR]

In the dynamic sphere of financial markets, hedge funds have emerged as a critical force, navigating through volatility with advanced risk management techniques yet grappling with the challenges posed by illiquid assets. This study aims to transcend traditional option pricing models, which struggle under the complexities of hedge fund investments, by exploring the applicability of machine learning in financial risk management. Leveraging Deep Neural Networks (DNNs) and Long Short-Term Memory (LSTM) cells, the research introduces a model-free, data-driven approach for discrete-time hedging problems. Through a comparative analysis of simulated data and the implementation of LSTM architectures, the paper elucidates the potential of these machine learning techniques to enhance the precision of risk assessments and decision-making processes in hedge fund investments. The findings reveal that DNNs and LSTMs offer significant advancements over conventional models, effectively capturing long-term dependencies and complex patterns within financial time series data. Consequently, the study underscores the transformative impact of machine learning on the methodologies employed in financial risk management, proposing a novel paradigm that promises to mitigate the intricacies of hedging illiquid assets. This research not only contributes to the academic discourse but also paves the way for the development of more adaptive and resilient investment strategies in the face of market uncertainties. [ABSTRACT FROM AUTHOR]

Substantial remunerative benefits accrue to managers of new hedge funds launched after the implementation of the Volcker Rule if their previous employer is a large US bank. After the rule, ex‐bankers' funds charge higher management fees and receive more flows as compared with other new hedge funds established during the same period. This phenomenon is related to changes in investor perception of the distribution of skills of new fund managers rather than to the actual differences in skills. Ex‐bankers' funds are indistinguishable from other funds in terms of performance, risk, and liquidation probability, both before and after the Volcker Rule. [ABSTRACT FROM AUTHOR]

Using fund returns and fund stockholdings, we investigate whether fund managers follow fundamental analysis strategies. We show that hedge fund and mutual fund returns tend to load negatively on the long-short returns of a comprehensive sample of fundamental strategies (i.e., accounting anomalies), suggesting that fund managers are prone to trade in the opposite direction of what fundamental strategies prescribe. The negative loadings are primarily driven by the short-leg of the anomalies, more pronounced for contrarian-like anomalies, and more prevalent among earnings quality, investment, external financing, value, and profitability-based anomalies. We show that funds with higher anomaly loadings perform significantly better. Our results suggest that fund managers, as a group, do not systematically pursue fundamental analysis strategies, perhaps due to agency concerns, but a subset of managers are skilled and profit from employing such strategies. We find similar results when examining the stockholdings of hedge funds and mutual funds. Our findings have important implications for the persistence of accounting anomalies, sophistication of institutional investors, and investment value of fundamental analysis. [ABSTRACT FROM AUTHOR]

Hedge funds earn positive ex post abnormal returns and avoid negative abnormal returns on their equity portfolios when trading in the opposite direction of highly diversified low-turnover institutional investors (quasi indexers). This pattern seems to be driven by the preferences of quasi indexers for high-market-beta stocks together with the ability of hedge funds to identify subsets of especially profitable trades. It remains pronounced when accounting for other determinants of hedge fund trades, such as stock liquidity, market anomalies, and major corporate events. Trading against other institutional investors or noninstitutions does not result in abnormal performance for hedge funds. This paper was accepted by David Sraer, finance. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2023.4877. [ABSTRACT FROM AUTHOR]

The literature on dual holding focuses exclusively on cases where the holder is primarily a creditor and buys the firm's stocks to reduce potential wealth transfer. However, wealth transfer is not a concern when the dual holder is a stockholder first and becomes a bondholder later. We hypothesize that the principal motive behind such dual holdings is to provide debt funding to an otherwise successful firm that cannot fund good projects because of internal capital allocation problems coupled with external capital constraints. We select samples from multinational corporations based on evidence that these firms are exposed to domestic underinvestment because they are reluctant to bring back foreign profits to avoid repatriation taxes. We choose hedge funds (HFs) as dual holders. The treatment group comprises firms where HFs are dual owners, and the control group comprises firms in which HFs own stocks only. The treatment group experiences steeper financial constraints, leading to deeper underinvestment problems and causing target firms to seek HF funding. The funding corresponds well to the amount of underinvestment. Targets improve investment efficiency by alleviating underinvestment, surpassing their predual performance and the control group's postdual performance. [ABSTRACT FROM AUTHOR]

Blockholder disclosure thresholds shape incentives for hedge fund activism, which are jointly determined with real investment and managerial behavior. Uninformed investors value lower thresholds (greater transparency) when the cost of trading against an informed activist outweighs the benefits of the activist's disciplining of management. Conversely, activists may desire disclosure thresholds if the threat of their participation discourages managerial malfeasance, which is their source of profits. Hedge fund activism can be excessive: If market opacity sufficiently harms uninformed investors, the costs of reduced real investment outweigh the social benefits from managerial disciplining, and society benefits from lower thresholds. [ABSTRACT FROM AUTHOR]

We find that defined benefit employee pension plans of firms that are targets of hedge fund activism experience underfunding and their defined contribution plans experience reductions in employer contributions. Pension underfunding occurs due to reduced employer contributions to the plans, which target firms justify by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Despite tilting plan investments toward riskier assets, pension fund performance does not improve after activists target a firm. Our evidence suggests that shareholder wealth gains from activism are partly wealth transfers from employees. [ABSTRACT FROM AUTHOR]

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call-option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private-information dissemination. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This article challenges the contemporary negative and dismissive narratives about distressed debt hedge funds (DDHFs), a subset of holdout creditors. A soft normative framework for regulating this category of creditors and other holdout creditors is however proposed to address their disruptive activities in the sovereign debt market. It is proposed that the Basel III framework be a conduit for enforcing the proposed normative framework because hedge funds are customers of institutions subject to Basel III oversight. One of the characteristics of these funds is their relatively sophisticated and high use of leverage. The authors therefore envisage the Basel III framework being expanded to provide for enforcement in this context. Finally, the normative framework proposed in this article differs from previous proposals including the Sovereign Debt Restructuring Mechanism (SDRM) and contractual solutions including Collective Action Clauses (CACs) and exit consents as it proposes the Basel III framework as an enforcement mechanism and is not a contractual solution. [ABSTRACT FROM AUTHOR]

I test the hypothesis that the use of leverage by market speculators can increase the likelihood and magnitude of crashes in asset prices. Using a direct leverage measure derived from US public filings, I find that (1) stocks held by highly leveraged hedge funds subsequently have more negatively skewed returns than stocks held by less leveraged funds and (2) upon extremely negative earnings surprises or funding liquidity shocks, stocks owned by high-leverage funds exhibit abnormal price declines and subsequent reversal. Consistent with the fire sale and contagion hypothesis, high-leverage funds tend to reduce the position following negative news about a stock, and such selling can extend to other stocks in the portfolio, increasing the crash proneness of the stocks they hold. [ABSTRACT FROM AUTHOR]

Mandatory filings for UK hedge funds suggest that managers having worked at the same prior employer invest more similarly in terms of distances of returns. If they overlapped in employment, increasing the chance of social ties, investments become even more similar. The joint effect accounts for up to two thirds of the difference in investing behavior. Results are robust to fund- and manager-level controls as well as to identification concerns. With controls, the same-employer effect is concentrated in the systematic component (beta), whereas the overlap effect is concentrated in the idiosyncratic components (alpha and residuals). Managerial ties make any two funds more similar in their stock holdings. Moreover, portfolios of connected funds outperform their peers in terms of alpha, return volatility, and Sharpe ratio. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data file is available at https://doi.org/10.1287/mnsc.2023.4843. [ABSTRACT FROM AUTHOR]

We present a framework for linking hedge funds to environmental, social, and governance (ESG) investments based on systematic ESG risk. We proposed a double-factor model to explain the co-movement of asset returns due to two systematic risk factors: Adjusted market risk and systematic ESG risk. Complementing prior work that introduces ESG characteristic indicators as determinants of agents' utility functions, this framework leverages modern portfolio theory by establishing a channel through which systematic ESG shocks affect asset risk and, in turn, equilibrium expected returns. This approach enabled us to estimate empirical market prices for systematic ESG risk from real-world observations and derive the relationship between equilibrium expected returns and the loadings on systematic risk factors. Applying this framework to U.S. equity mutual funds, we found that the loadings of systematic ESG risk were significantly correlated with the expected return of the sorted portfolios. These results suggested that it is possible to design hedge fund strategies that capitalize on systematic ESG risk that varies over time. [ABSTRACT FROM AUTHOR]

This research study provides insights on how activist hedge funds perform valuation analyses of target firms. Relevant data was hand‐collected from a sample of activist hedge fund presentations. Based on the hedge funds' valuation analyses, the undervaluation of the target firms amounts to approximately 30%, compared to the targets' current share price. Besides, activist investors derive a value enhancement potential from their proposed strategies of approximately 70% to the targets' current share price. These valuation results rely predominately on trading multiples. The dominant multiples are Enterprise value/EBITDA (EV/EBITDA) and Price/Earnings (P/E). Further, applied multiples are mainly forward‐looking, and the predicted performance measures are primarily consensus estimates. Besides, hedge funds sometimes adjust multiples arbitrarily to increase the comparability. Our results confirm that short‐term investors rely predominately on pricing analyses in their valuations. [ABSTRACT FROM AUTHOR]

Shadow banks, such as investment funds, hedge funds, and mortgage finance companies, have grown rapidly in recent years. We analyze the link between monetary policy and the growth of shadow banks and, by extension, financial stability in Canada. Using monthly financial market data from 1991 to 2015, we first find that contractionary monetary policy does not cause the expected reduction in shadow bank business loans and mortgage loans as it does in chartered bank credit. This suggests that as shadow banks have grown in importance, the effectiveness of monetary policy in reducing inflation has been impaired. We find evidence to support that hypothesis using a two-stage time-varying coefficient Bayesian vector autoregression approach. [ABSTRACT FROM AUTHOR]

While the concepts of portfolio optimization and diversification are extremely well explored in the academic literature, relatively little has been written on how to assess the incremental benefit of adding a new asset class to an existing portfolio based on the characteristics of that asset class and its interaction with the portfolio. In this article, the authors introduce the concept of a return hurdle, corresponding to the return required from a particular candidate asset class to improve the risk-return characteristics of an existing portfolio for a given allocation size. They demonstrate how return hurdles vary as a function of correlation, creating return indifference curves that explicitly illustrate the trade-off between required asset class return and potential diversification benefit. The authors illustrate the value of the framework by comparing theoretical return indifference curves with what may be achievable in practice based on the performance of a range of different hedge fund portfolios targeting specific levels of equity correlation. [ABSTRACT FROM AUTHOR]

We examine whether time-varying investor demand affects hedge fund companies' decision to start new funds. We find significantly more fund inceptions in hot markets than in cold markets. Funds opened in hot markets exhibit weaker long-term performance, shorter survival time, and greater fraud risk. Investor clientele also varies with market conditions. Investors in hot markets appear to be less sophisticated, which may provide opportunities for more low-quality funds to enter the industry. Overall, inceptions due to high investor demand are not in the best interest of investors. [ABSTRACT FROM AUTHOR]

Inspired by research on social movements, we extend the idea that activists look for opportunities to target firms to the realm of financially motivated shareholder activists. Focusing on activist hedge funds, we argue that hedge fund campaigns are more likely to succeed when boards are slow and less united and that, compared with more homogeneous boards, demographically diverse boards tend to act more slowly and with less unity. Although these attributes make demographically diverse boards more effective under "normal" circumstances, they become a liability in confrontations with activist hedge funds. We, therefore, hypothesize that when subject to governance and performance problems, firms become more likely targets of activist hedge funds when they also have demographically diverse boards. To further probe our theory, we explore the opportunity recognition of activist hedge funds in two ways. First, we posit that this opportunity will be recognized and exploited primarily by experienced activist hedge funds. Second, we argue that activist hedge funds' opportunity recognition is correct in so far that demographically diverse boards respond to activism campaigns in ways that are likely to benefit activist hedge funds. Using data on United States-based activism campaigns, we find support for our theory. By simultaneously studying problems and opportunities, this study establishes a foundation for examining when the disciplinary effect of shareholder activism may go awry and reveals why a strict business case for demographic diversity may be insufficient to align all shareholders behind board diversity. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.1679. [ABSTRACT FROM AUTHOR]

We study whether fund managers' industry experience is an important source of value creation in hedge fund activism. We find that the targets of industry‐expert fund managers realize higher activism announcement returns and better operating performance, particularly when fund managers' industry expertise is more valuable for targets. These targets also engage in more focused acquisition and divestiture activities in industries where fund managers have experience, allocate more employees to these industries, and cut investments more in the postacquisition period. The superior performance of targets of industry‐expert fund managers is robust to controlling for the endogeneity concern and the attrition bias. [ABSTRACT FROM AUTHOR]

We analyze the role of hedge fund, swap dealer, and arbitrageur activity in the crude oil market. The contribution of our work is to examine the role of institutional traders in switching between high-volatility and low-volatility regimes. Using confidential position data on institutional investors, we first analyze the linkages between trader positions and fundamentals. We find that these institutional position changes reflect fundamental economic factors. Subsequently, we adopt a Markov regime-switching model with time-varying probabilities and find that institutional position changes contribute incrementally to the probability of regime changes. [ABSTRACT FROM AUTHOR]

We provide new insights on how hedge funds use options and short-selling channels to trade on their negative information. Bearish information in hedge fund option positions is economically large, distinct from information in short interest, and it is the combination of option positions and short interest that provides the strongest information signal. A portfolio of stocks with high short interest and bearish hedge fund option positions predicts negative abnormal returns that are more than four times as large as the portfolio with high short interest and bullish options positions. The information in hedge fund option positions increases during periods of market stress, whereas that in short interest does not. This increase is concentrated in capital-constrained hedge funds, suggesting that options provide a channel for capital-constrained hedge funds to exploit their information advantage. This paper was accepted by Lukas Schmid, finance. Funding: J. Hua received support for this project from a PSC-CUNY Award, jointly funded by The Professional Staff Congress and The City University of New York. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4785. [ABSTRACT FROM AUTHOR]