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This paper specifies a simulated convertible bond arbitrage portfolio to characterise the risks in convertible bond arbitrage. For comparison the risk profile of convertible bond arbitrage hedge fund indices at both monthly and daily frequencies is also examined. Results indicate that convertible bond arbitrage is positively related to default and term structure risk factors. These risk factors are augmented with the simulated convertible bond arbitrage portfolio, mimicking a passive investment in convertible bond arbitrage, to assess the risk and return of individual hedge funds. We provide estimates of the performance of two hedge fund indices (an equally weighted and value weighted index) and a sample of convertible bond arbitrage hedge funds using a factor model methodology. Lagged and contemporaneous observations of the risk factors are specified, controlling for illiquidity in the securities held by funds. Our results cover two time periods. Initially we find evidence of abnormal risk adjusted returns in the individual hedge fund data and the equally weighted hedge fund index and no evidence of abnormal risk adjusted returns in the value weighted hedge fund index. When we examine performance during the credit crisis of 2007 and 2008 we find evidence of negative abnormal returns amongst individual hedge funds and the hedge fund indices.

Recent academic and practitioner attention has focused on currency momentum. In this paper we replicate technical trading rules to assess their relationship with momentum. We find the effectiveness of technical trading rules falls significantly over time, with the mean Sharpe Ratio of our sample of portfolios falling from 0.66 in our in-sample period to 0.06 out-of-sample. Further, the returns do not survive modest transaction costs out-of-sample. We identify time series momentum as the single common factor driving returns across the range of strategies. Any abnormal return generated by technical trading rules is fully explained by time series momentum.

We show that carry, momentum and value predictability in currencies is associated with mispricing. Specifically, investment performance disappears subsequent to published evidence showing portfolio returns are not fully explained by risk. Replicating these studies, we show that the average out-of-sample Sharpe ratio decreases from +0.39 to −0.32. Cross sectional tests show that currencies no longer respond to interest rate and real exchange rate differentials. During this period currency excess returns do not exhibit autocorrelation. Our results are consistent with investors learning about mispricing from academic research.

Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance.

Prior research in hedge fund and mutual fund management finds a positive relation between portfolio distinctiveness and subsequent performance, suggesting that strategy differentiation is associated with superior skill. We find that commodity trading advisors (CTAs) with returns that correlate more strongly with those of peers feature higher performance and are more highly exposed to a time series momentum factor. Strategy conformity appears to be a signal of managerial skill in CTAs, in contrast to hedge funds and mutual funds. These results indicate that a common trend following strategy drives CTA returns and that CTAs offer investors an opportunity to invest in momentum.

We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures under-estimate (over-estimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted out-performance is 5.5%.

There is a growing literature examining futures-based trading strategies and the performance of Commodity Trading Advisors (CTAs). In this article, the authors test the validity of three key assumptions used in these studies. They test the validity of basing conclusions on analysis of synthetic rather than market price data; they review the evidence on the level of transaction costs, to test the cost model used in modeling futures-based trading strategy; and finally, they test the assumption that CTAs generally charge a management fee of 2% and incentive (performance) fee of 20%. In addition, they present the trend over time in the structure of fees. Their findings suggest that inferences based on synthetic futures replicate those based on exchange-traded data. Over the full period, the average fee levels were 1.82% (management) and 20.2% (incentive)—not significantly different from the levels used in the literature. TOPICS:Futures and forward contracts, real assets/alternative investments/private equity, commodities

Recently, a range of alternative risk premium products has been developed, promising investors hedge fund/Commodity Trading Advisor (CTA)-like returns with higher liquidity and transparency and relatively low fees. The attractiveness of these products rests on the assumption that they can deliver similar returns. Using a novel reporting bias–free sample of 3,419 CTA funds as a testing ground, the authors’ results suggest that this assumption is questionable. They find that CTAs are not a homogenous group. They identify eight different CTA substrategies, each with very different sources of return and low correlation between substrategies. To illustrate the difficulty of modelling the strategies, they specify recently identified alternative risk premiums from the academic literature as factors to examine the sources of return of CTAs. They find that these premiums fail to explain between 56% and 86% of returns. Their results suggest that given the heterogeneity of CTAs, although these new products may deliver on liquidity, transparency, and fees, investors expecting hedge fund/CTA-like returns may be disappointed.

The time series momentum strategy, previously known as trend following, has been shown to deliver consistent profitability over a long time horizon in futures markets. Funds pursuing this strategy are now a component of many institutional portfolios, due to the expectation of positive returns in equity bear markets. However, the return drivers of the strategy and its performance in other economic conditions are less well understood. We find evidence that the returns to the strategy are connected to the business cycle. Returns are positive in both recessions and expansions, but profitability is higher in expansions. Decomposing asset prices into factor related and idiosyncratic components, we associate a significant portion of returns with exposure to time varying economic factors, consistent with rational asset pricing theories having a role in explaining the profitability of the strategy.

Regulatory reporting across multiple jurisdictions is a significant cost for financial services organizations, due to a lack of systems integration (often with legacy systems) and no agreed industry data standards. This article describes the design and development of a novel ontology-based framework to illustrate how ontologies can interface with distributed data sources. The framework is then tested using a survey instrument and an integrated research model of user satisfaction and technology acceptance. A description is provided of extensions to an industry standard ontology, specifically the Financial Industry Business Ontology (FIBO), towards enabling greater data interchange. Our results reveal a significant reduction in manual processes, increase in data quality, and improved data aggregation by employing the framework. The research model reveals the range of factors that drive acceptance of the framework. Additional interview evidence reveals that the ontological framework also allows organizations to react to regulatory changes with much-improved timeframes and provides opportunities to test for data quality.

The attention-grabbing hypothesis has been offered as a behavioural explanation for post-event abnormal returns for FDA drug approval announcements for NYSE listed firms. We show that when event-day mis-specification is accounted for, the market reaction is centred on the event-day and that the increase in firm value is driven by after-market-close approval announcements.

There is a growing literature examining futures based trading strategies and the performance of Commodity Trading Advisors (CTAs). In this paper, we test the validity of three key assumptions used in these studies. The validity of basing conclusions on analysis of synthetic rather than market price data is tested. We review the evidence on the level of transaction costs to test the cost model used in modelling futures based trading strategy. Finally, we test the assumption that CTAs generally charge a management fee of 2% and incentive (performance) fee of 20%. In addition, the trend over time in the structure of fees is presented. Our findings suggest that inferences based upon synthetic futures replicate those based on exchange-traded data. Over the full period, the average fee levels were measured at 1.82% (management) and 20.2% (incentive) close to and not significantly different from the levels used in the literature.

Based on the Qur ' anic prohibition against interest ( riba ), this paper quantifies the true cost of purification for the first time. The extant literature focuses on the performance of various Islamic portfolios but the returns of these funds are pre-purification. This is a significant oversight given that, for some scholars, the entire permissibility of the industry rests on purification. By comparing the impact on returns of three purification methodologies we show that purification adversely and statistically significantly impacts portfolio returns and that the choice of purification methodology also matters. Our results are robust to alternative portfolio construction methodologies and standardised tax rates. The implications are that purification is not a trivial matter for compliant Muslim investors — comprehensive shari'ah compliance has a significant faith and financial implications for compliant Muslim investors such that it could be argued that, by ignoring the impact of purification on returns, the findings of the extant literature are incomplete.

Following large positive returns in 2008, CTAs received increased attention and allocations from institutional investors. Subsequent performance has been below its long term average. This has occurred in a period following the largest financial crisis since the Great Depression. In this article, using almost a century of data, the authors investigate what typically happens to the core strategy pursued by these funds in global financial crises. They also examine the time series behavior of the markets traded by CTAs during these crisis periods. Their results show that in an extended period following financial crises, trend following average returns are less than half of those earned in no-crisis periods. Evidence from regional crises shows a similar pattern. They also find that futures markets do not display the strong time series return predictability prevalent in no-crisis periods, resulting in relatively weak returns for trend following strategies in the four years immediately following the start of a financial crisis.

In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero.

Practical Applications Summary In Testing Futures Trading Strategy Assumptions, from the the Fall 2019 issue of The Journal of Alternative Investments, Mark C. Hutchinson and John O’Brien (both of the Cork University Business School, University College, Cork) investigate the robustness of common assumptions made in studies of commodity trading advisor (CTA) performance. Two factors motivate their inquiry: The first is an increasing interest in performance studies of these futures-based trading strategies. The second is that existing skepticism in reported high risk-adjusted CTA returns is attributed to faulty assumptions underlying prior studies, and that such assumptions produced overstated performance. The authors examined (1) the appropriateness of using synthetic futures as a proxy for CTA strategy returns, and (2) the reasonableness of typical assumptions about transaction costs, management fees, and incentive fees. They found that strategy returns using synthetic futures were highly correlated with those based on the corresponding exchange-traded instruments. Transaction costs vary across asset classes. Both transaction costs and management fees have declined over time. In general, the authors found that assumptions that account for these differences in transaction costs over time were realistic approximations of the true costs. TOPICS:Futures and forward contracts, commodities, performance measurement

During the recent financial crisis dedicated short bias (DSB) hedge funds exhibited extremely strong results while many other hedge fund strategies suffered badly. This article, prompted by this recent episode, investigates DSB hedge fund performance over an extended sample period, from January 1994 to December 2008. Performance and risk evaluation are carried out on an equally weighted DSB hedge fund portfolio using three different factor model specifications and both linear and nonlinear estimation techniques. The authors conclude that DSB hedge funds are a significant source of diversification for equity market investors and produce statistically significant levels of alpha. Their findings are robust to the specification of traditional and alternative risk factors, nonlinearity, and the omission of the crisis periods, which are particularly favorable for the DSB strategy.

This paper models the returns of the convertible arbitrage hedge fund strategy using a non-linear framework. Investors in the CA strategy have experienced long periods of persistent positive returns accompanied by low volatility, followed by shorter periods of extreme negative returns and high volatility, associated with periods of broad market upheaval. The smooth transition regression (STR) model specified in this study is particularly appropriate for assessing the performance of a strategy of this nature, as it allows for smooth transition between risk regimes. We find that in the alternate regimes the strategy exhibits relatively high (low) exposure to risk factors and alpha is high (low). We suggest that evidence reported in this paper accounts for abnormal returns reported for the strategy in previous studies.

This article examines the characteristics of high-frequency pairs trading using a sample of FTSE100 constituent stocks for the period January to December 2007. The authors show that the excess returns of the strategy are extremely sensitive both to transaction costs and speed of execution. When we specify a moderate level of transaction costs (15 basis points), the excess returns of the strategy are reduced by more than 50%. Likewise, when a wait-one-period restriction on execution is implemented, the returns of the strategy are eliminated. When the time series properties of pairs trading returns are further examined, it is seen that the majority of returns occur in the first hour of trading. Finally, the authors find that the excess returns bear little exposure to traditional risk factors but are weakly related to market and reversal risk factors.

Whistleblowing involves employees reporting upon wrongdoing occurring in their organisation. Traditional views of whistleblowing (a disloyal act) are evolving towards a more modern view (sympathetic). This study evaluates attitudes towards whistleblowing in Ireland. Corporate employees reviewed business scenarios, evaluated whether they were prepared to become whistleblowers or not and gave their reasons. They also evaluated their organisation’s attitude towards whistleblowing. The findings suggest many employees (particularly males) are still reluctant to report wrongdoings in their workplace and would rather report internally than externally. Also, employees who do whistle-blow are motivated more by feelings of loyalty than self-interest. Finally employees do not consider their organization particularly supportive of whistleblowing. Results suggest organisations must do more to promote whistleblowing if employees are to be encouraged to do so appropriately.

PurposeThe research aims to test whether the ability to measure marketing performance affects the actual performance of firms, in the context of the European high‐tech sector. It also aims to test whether performance‐reporting frequency and size of marketing budget mediate the relationship between measurement ability and performance.Design/methodology/approachSurvey responses collected from 157 marketers were supplemented with firm performance data.FindingsResults show that marketing performance measurement ability positively impacts firm performance and that reporting frequency mediates this relationship.Research limitations/implicationsMore attention should be given to the activities that are measured rather than the metrics in use – which receive much attention in the literature. Current interest in marketing dashboards may be overstated.Practical implicationsEnhanced ability to account for marketing leads not only to improved firm performance, but also to greater regard for marketing at the senior management level.Originality/valueThis is the first study to demonstrate a link between marketing performance measurement ability or frequency and firm performance in the European market. It also provides an insight into the chain of effects linking marketing performance measurement ability to firm performance.

The recent growth in interest in convertible bond arbitrage (CBA) has come predominately from the hedge fund industry. Past empirical evidence has shown that a CBA strategy generates positive monthly abnormal risk adjusted returns. However, these studies have focused on hedge fund returns which exhibit instant history bias, selection bias, survivorship bias and smoothing. This paper replicates the core underlying CBA strategy to generate an equally weighted and market capitalisation daily CBA return series free of these biases, for the period 1990 through to 2002. These daily series also capture important short-run price dynamics that previous studies have ignored.

The time series momentum strategy has been shown to deliver consistent profitability over a long time horizon. Funds pursuing these strategies are now a component of many institutional portfolios, due to the expectation of positive returns in equity bear markets. However, the return drivers of the strategy and its performance in other economic conditions are less well understood. The authors find evidence that the returns to the strategy are connected to the business cycle. Returns are positive in both recessions and expansions, but profitability is especially high in expansions. About 40% of returns are due to time varying factor-related risk exposure, consistent with rational asset pricing theories having a role in explaining the profitability of the strategy.

We investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research.

Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.

This paper studies the relation between return skewness, fund flows, and hedge fund performance. Our results show that hedge fund returns exhibit significant skewness and fund investors prefer skewness. Annual flows into hedge funds with positively skewed returns are 11.5% higher than comparable funds with negatively skewed returns. Evaluating hedge fund performance using a new performance measure that accounts for return skewness leads to superior ex-ante fund selection. During the 1994 to 2009 period, the average improvement in out-of-sample annual performance is 2%. Our measure is particularly valuable during periods of economic crisis when returns are more likely to exhibit skewness and the improvement in annual performance is about 4%.

Following large positive returns in 2008, Commodity Trading Advisors (CTAs) received increased attention and allocations from institutional investors. Subsequent performance has been below its long term average. This has occurred in a period following the largest financial crisis since the great depression. In this paper, using almost a century of data, we investigate what typically happens to the core strategy pursued by these funds in global financial crises. We also examine the time series behaviour of the markets traded by CTAs during these crisis periods. Our results show that in an extended period following financial crises trend following average returns are less than half those earned in no-crisis periods. Evidence from regional crises shows a similar pattern. We also find that futures markets do not display the strong time series return predictability prevalent in no-crisis periods, resulting in relatively weak returns for trend following strategies for, on average, four years following the start of a financial crisis.

92 percent of hedge funds in the TASS database have returns which exhibit systematic skewness so the alpha of the managers of these hedge funds is difficult to estimate with OLS. To control for skewness the Residual Augmented Least Squares (RALS) estimator is specified to measure the performance of these hedge funds. We demonstrate that the OLS performance assessment error depends systematically on skewness, is economically significant, and that RALS is not sensitive to this bias. Furthermore, portfolios formed on RALS alphas are more persistent than those formed on OLS alphas, particularly during crisis periods.

This study tests a large sample of UK equity returns from 1965 to 2007 for predictability. Returns are tested using the Lo and MacKinlay (1988) variance ratio test and the Chow and Denning (1993) multiple variance ratio tests. Overall, the results show strong signs of predictability. There is a size effect, in which small equities appear more predictable in the first half of the sample (1965– 1985), and mid- to large size equities appear more predictable in the second half of the sample (1986–2007).

Returns of hedge funds generally exhibit non-normality. It is well documented that if asset returns have systematic skewness, expected returns should include rewards for accepting this risk. This skewness risk premium should be controlled for in any estimate of performance. To investigate this issue we specify the Residual Augmented Least Squares (RALS) estimator, designed to exploit non-normality in a time series’ distribution. Specifying a linear factor model, we provide robust estimates of hedge fund performance, demonstrating the increase in efficiency of RALS relative to OLS estimation. Our evidence suggests that measuring performance using OLS alphas is inefficient, understating the performance of some hedge funds and overstating the performance of others. We then examine the source of the OLS mispricing. We find that the level of mispricing is positively related to estimates of skewness in the historical fund returns. We conclude that when estimated by OLS the performance of managers who pursue a strategy exhibiting positive skewness is understated and those whose strategy exhibits negative skewness is overstated. Estimation by RALS overcomes this. Our findings are robust to the biases in hedge fund databases.

This paper replicates the core underlying merger arbitrage strategy using daily data from the United Kingdom to generate three simulated merger arbitrage portfolio return series, for the period 2001 through to 2004. Past empirical evidence indicates that the merger arbitrage strategy generates large risk adjusted returns. More recent evidence indicates that the strategy has a return distribution equivalent to a short put option on a stock index. These prior studies have generally focused on monthly returns in the North American stock markets. For the UK market we find evidence that the merger arbitrage strategy exhibits little systematic risk and generates significant risk adjusted returns. Contrary to prior research we find no evidence of an increase in systematic risk in depreciating equity markets.