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The authors investigate the leverage of hedge funds in the time series and cross section. They find that hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the market leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values both forecast increases in hedge fund leverage. Decreases in fund return volatilities predict future increases in leverage.
To order complete paper click here.
Thursday, March 17, 2011
Skill, Luck and the Multiproduct Firm: Evidence from Hedge Funds
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Is it more important for hedge fund managers to be lucky or skilled when expanding to offer new products?
How about both?
In "Skill, Luck and the Multiproduct Firm: Evidence from Hedge Funds," Wharton management professor Evan Rawley and Rui J.P. de Figueiredo, Jr., of the University of California Berkeley, explore how strong returns from existing hedge funds drive launches of new products. They observe that, while many funds post strong returns at some point in time, the "lucky" funds separate themselves from the "skilled" funds based on their diversification choices immediately afterwards.
The fee structure of hedge funds drives them to launch new funds; more expansive is always better when working off a percentage of gross returns without "clawbacks." But fund managers understand that launching new funds can reveal their weaknesses as money managers. So while the authors show that most managers wait until they generate strong returns to launch a new fund, investors have good reason not to worry that a fund contacting them for money is basing the pitch on a single fluke period. The poor manager knows he or she cannot sustain those strong returns, and that opening a new fund presents a tremendous risk to his or her reputation, Rawley notes. Meanwhile, the skilled manager knows that he or she can benefit from diversification into a new fund and keep that reputation intact.
To demonstrate this effect, Rawley and de Figueiredo followed a select sample of 1,353 funds from 1994 to 2006. While 676 of these funds remained "focused," the remainder launched a new fund. The study finds that the new funds boasted returns of six basis points higher per month per unit of risk compared to focused funds; the higher returns suggest superior fund management.
But that does not necessarily mean that only the weaker funds chose to stay focused. "There are some good firms that want to remain focused, and there are some bad, lucky firms that end up diversifying," Rawley says, meaning that a lack of diversification might not be sufficient grounds to reject investing in a hedge fund. Specific factors, like the existing fund's clients and the cost of launching a new fund, may prevent "skilled" funds from branching out.
In addition, there are some limitations to applying this theory outside of the hedge fund industry, according to Rawley. Hedge fund managers usually have their own wealth in the fund, making them averse to the short-term versus long-term tradeoffs that industrial managers might make. Hedge funds must also go to capital markets to fund expansions, while companies in the "real economy" might fund expansions with money from their own balance sheets. But Rawley suggests that the study may help other researchers or industry analysts to better understand the role of luck and skill in other business contexts. "We show that both of these effects are important. You can't just talk about one in isolation."
Is it more important for hedge fund managers to be lucky or skilled when expanding to offer new products?
How about both?
In "Skill, Luck and the Multiproduct Firm: Evidence from Hedge Funds," Wharton management professor Evan Rawley and Rui J.P. de Figueiredo, Jr., of the University of California Berkeley, explore how strong returns from existing hedge funds drive launches of new products. They observe that, while many funds post strong returns at some point in time, the "lucky" funds separate themselves from the "skilled" funds based on their diversification choices immediately afterwards.
The fee structure of hedge funds drives them to launch new funds; more expansive is always better when working off a percentage of gross returns without "clawbacks." But fund managers understand that launching new funds can reveal their weaknesses as money managers. So while the authors show that most managers wait until they generate strong returns to launch a new fund, investors have good reason not to worry that a fund contacting them for money is basing the pitch on a single fluke period. The poor manager knows he or she cannot sustain those strong returns, and that opening a new fund presents a tremendous risk to his or her reputation, Rawley notes. Meanwhile, the skilled manager knows that he or she can benefit from diversification into a new fund and keep that reputation intact.
To demonstrate this effect, Rawley and de Figueiredo followed a select sample of 1,353 funds from 1994 to 2006. While 676 of these funds remained "focused," the remainder launched a new fund. The study finds that the new funds boasted returns of six basis points higher per month per unit of risk compared to focused funds; the higher returns suggest superior fund management.
But that does not necessarily mean that only the weaker funds chose to stay focused. "There are some good firms that want to remain focused, and there are some bad, lucky firms that end up diversifying," Rawley says, meaning that a lack of diversification might not be sufficient grounds to reject investing in a hedge fund. Specific factors, like the existing fund's clients and the cost of launching a new fund, may prevent "skilled" funds from branching out.
In addition, there are some limitations to applying this theory outside of the hedge fund industry, according to Rawley. Hedge fund managers usually have their own wealth in the fund, making them averse to the short-term versus long-term tradeoffs that industrial managers might make. Hedge funds must also go to capital markets to fund expansions, while companies in the "real economy" might fund expansions with money from their own balance sheets. But Rawley suggests that the study may help other researchers or industry analysts to better understand the role of luck and skill in other business contexts. "We show that both of these effects are important. You can't just talk about one in isolation."
Saturday, March 12, 2011
Barclay Hedge Fund Index Gains 1.18% in February
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Hedge Funds Are Up Six Months in a Row
Hedge funds gained 1.18% in February according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is up 1.65% year-to-date.
“In the face of Mideast political turmoil and rising commodity prices, the rally in developed market equity prices extended to a sixth consecutive month,” says Sol Waksman, founder and president of BarclayHedge.
“Hedge funds have been able to take advantage of the favorable trading environment as evidenced by a gain of 11.1 percent in the Barclay Hedge Fund Index over the past six months.”
Overall, 16 of Barclay’s 18 hedge fund indices had positive returns in February. The Barclay Equity Long Bias Index gained 3.05%, Technology was up 2.31%, Convertible Arbitrage gained 1.65%, Multi Strategy added 1.55%, and Fixed Income Arbitrage rose 1.42%.
“Treasury markets were mixed as fears of inflation early in the month were supplanted by geopolitical uncertainties as the month progressed,” says Waksman.
“Prices for high yield debt continued to increase as demand from yield-hungry investors remained strong.”
The Equity Short Bias Index lost 2.91% in February, and the Emerging Markets Index slid 0.58%. Equity Short Bias is now down 3.61% in 2011 after two months of trading.
The Barclay Fund of Funds Index gained 0.86% in February.
Click here to view five years of Barclay Hedge Fund Index data, or download 13 years of monthly data.
BarclayHedge was founded in 1985 and actively tracks more than 6,000 hedge funds, funds of hedge funds, and managed futures programs. Each month Barclay provides updated performance rankings for 38 Hedge Fund categories and 16 CTA categories.
Hedge Funds Are Up Six Months in a Row
Hedge funds gained 1.18% in February according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is up 1.65% year-to-date.
“In the face of Mideast political turmoil and rising commodity prices, the rally in developed market equity prices extended to a sixth consecutive month,” says Sol Waksman, founder and president of BarclayHedge.
“Hedge funds have been able to take advantage of the favorable trading environment as evidenced by a gain of 11.1 percent in the Barclay Hedge Fund Index over the past six months.”
Overall, 16 of Barclay’s 18 hedge fund indices had positive returns in February. The Barclay Equity Long Bias Index gained 3.05%, Technology was up 2.31%, Convertible Arbitrage gained 1.65%, Multi Strategy added 1.55%, and Fixed Income Arbitrage rose 1.42%.
“Treasury markets were mixed as fears of inflation early in the month were supplanted by geopolitical uncertainties as the month progressed,” says Waksman.
“Prices for high yield debt continued to increase as demand from yield-hungry investors remained strong.”
The Equity Short Bias Index lost 2.91% in February, and the Emerging Markets Index slid 0.58%. Equity Short Bias is now down 3.61% in 2011 after two months of trading.
The Barclay Fund of Funds Index gained 0.86% in February.
Click here to view five years of Barclay Hedge Fund Index data, or download 13 years of monthly data.
BarclayHedge was founded in 1985 and actively tracks more than 6,000 hedge funds, funds of hedge funds, and managed futures programs. Each month Barclay provides updated performance rankings for 38 Hedge Fund categories and 16 CTA categories.
Monday, January 24, 2011
2010 funding and merger and acquisition (M&A) activity for the healthcare IT sector
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Mercom Capital Group, llc, a global market intelligence, consulting and communications firm, today released 2010 funding and merger and acquisition (M&A) activity for the healthcare IT sector.
The Healthcare IT sector had $211 million in venture capital (VC) funding in 2010 in 22 deals. Sixty-two different investors participated in these funding rounds. $629 million was raised by Healthcare IT companies outside of VC funding, through various forms of debt and credit facilities, which is a positive sign for the sector. Significant VC transactions included a $60 million Series C raise by Castlight Health, a $30 million raise by PatientSafe Solutions and a $20 million Series D raise by Phreesia. The top five investors in the sector for 2010 included VantagePoint Venture Partners, Long River Ventures, Morgenthaler Ventures, OpenView Venture Partners and Osage Partners.
M&A activity was robust in the Healthcare IT sector totaling almost $4 billion in 85 different deals. Only 21 deals were disclosed, indicating a much larger M&A activity number. Notable transactions included the $1.3 billion merger of Allscripts and Eclipsys, the acquisition of Phase Forward by Oracle for $685 million and the acquisition of Medicity by Aetna for $500 million. “Consolidation and strategic acquisitions among Healthcare IT companies helped fuel this surge in M&A activity,” commented Raj Prabhu, Managing Partner at Mercom Capital Group.
Healthcare IT – Fourth Quarter
VC funding activity decreased in Q4 coming in at $11 million in five transactions out of which three were disclosed, compared to $62 million for seven transactions during Q3. Notable VC transactions included a Series A raise of $7.5 million by DICOM Grid and a $2.6 million raise by Halfpenny Technologies. Debt and other funding activity amounted to $567 million in two disclosed transactions, Agfa’s $130 million loan by the European Investment Bank and the $394 million loan provided to CompuGroup Medical underwritten by SEB.
M&A activity for the sector saw a surge in the number of deals compared to Q3. Out of 30 M&A transactions, seven were disclosed for a total of $860 million compared to the third quarter that had a total of 19 deals of which three were disclosed for $326 million. The $500 million acquisition of Medicity by Aetna and the $250 million acquisition of PHNS by The ConJoin Group were the notable transactions that took place in Q4.
Mr. Prabhu continued, “Healthcare IT funding steadily dropped in Q4, while the number of M&A transactions almost doubled, indicating that we might be seeing some consolidation in the industry.”
Download healthcare IT funding reports.
Download charts and graphs.
Mercom Capital Group, llc, a global market intelligence, consulting and communications firm, today released 2010 funding and merger and acquisition (M&A) activity for the healthcare IT sector.
The Healthcare IT sector had $211 million in venture capital (VC) funding in 2010 in 22 deals. Sixty-two different investors participated in these funding rounds. $629 million was raised by Healthcare IT companies outside of VC funding, through various forms of debt and credit facilities, which is a positive sign for the sector. Significant VC transactions included a $60 million Series C raise by Castlight Health, a $30 million raise by PatientSafe Solutions and a $20 million Series D raise by Phreesia. The top five investors in the sector for 2010 included VantagePoint Venture Partners, Long River Ventures, Morgenthaler Ventures, OpenView Venture Partners and Osage Partners.
M&A activity was robust in the Healthcare IT sector totaling almost $4 billion in 85 different deals. Only 21 deals were disclosed, indicating a much larger M&A activity number. Notable transactions included the $1.3 billion merger of Allscripts and Eclipsys, the acquisition of Phase Forward by Oracle for $685 million and the acquisition of Medicity by Aetna for $500 million. “Consolidation and strategic acquisitions among Healthcare IT companies helped fuel this surge in M&A activity,” commented Raj Prabhu, Managing Partner at Mercom Capital Group.
Healthcare IT – Fourth Quarter
VC funding activity decreased in Q4 coming in at $11 million in five transactions out of which three were disclosed, compared to $62 million for seven transactions during Q3. Notable VC transactions included a Series A raise of $7.5 million by DICOM Grid and a $2.6 million raise by Halfpenny Technologies. Debt and other funding activity amounted to $567 million in two disclosed transactions, Agfa’s $130 million loan by the European Investment Bank and the $394 million loan provided to CompuGroup Medical underwritten by SEB.
M&A activity for the sector saw a surge in the number of deals compared to Q3. Out of 30 M&A transactions, seven were disclosed for a total of $860 million compared to the third quarter that had a total of 19 deals of which three were disclosed for $326 million. The $500 million acquisition of Medicity by Aetna and the $250 million acquisition of PHNS by The ConJoin Group were the notable transactions that took place in Q4.
Mr. Prabhu continued, “Healthcare IT funding steadily dropped in Q4, while the number of M&A transactions almost doubled, indicating that we might be seeing some consolidation in the industry.”
Download healthcare IT funding reports.
Download charts and graphs.
Friday, January 21, 2011
HEDGE FUNDS END 2010 WITH RECORD QUARTERLY ASSET INCREASE
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Investors favor Macro, Arbitrage funds as industry nears pre-crisis asset level; Increasing risk tolerance and falling volatility influence investor allocations
The hedge fund industry concluded 2010 with the largest quarterly increase in assets in its history, according to data released today by Hedge Fund Research (HFR), the leading provider of hedge fund industry data. Total industry assets grew to $1.917 trillion, reflecting a quarterly increase of nearly $149 billion, topping the previous record increase of $140 billion in 2Q07. The year-end figure approaches the historical asset peak of $1.93 trillion set in 2Q08 and represents an asset increase of 44 percent since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10.
Investors continued to increase allocations to the hedge fund industry, committing $13.1 Billion net new capital to hedge funds in 4Q. This figure follows $19 billion of new capital from the prior quarter and brings full-year 2010 net inflows to $55.5 billion, the highest annual total since 2007. In contrast to prior years, falling volatility contributed to a more narrow performance dispersion among hedge fund strategies, with Relative Value Arbitrage gaining +11.7 percent, while Macro strategies posted a gain of +8.6 percent, bounding gains of +11.5 and +10.6 percent for Event- Driven and Equity Hedge strategies, respectively.
Investors exhibited a clear preference for Macro strategies in 4Q, allocating $6.6 Billion of new capital to Macro funds, while Equity Hedge experienced a small net redemption of $620 Million. For the full year, $21.5 billion in new inflows went to Relative Value strategies, with Macro and Event Driven adding $17.3 billion and $14.0 billion. Equity Hedge, the largest strategy area by assets, experienced an increase of $2.6 billion for 2010. Investors allocated $1.8 billion to Funds of Hedge Funds (FOFs) in 4Q10, the second consecutive quarter of inflows for FOFs.
Increasing investor risk tolerance also contributed to a moderation in the concentration of quarterly allocations to the industry’s largest firms. While more than 80 percent of net new assets were allocated to firms with more than $5 billion in AUM for the entire year, only 51.6 percent of inflows went to the industry’s largest firms in 4Q.
Investors favor Macro, Arbitrage funds as industry nears pre-crisis asset level; Increasing risk tolerance and falling volatility influence investor allocations
The hedge fund industry concluded 2010 with the largest quarterly increase in assets in its history, according to data released today by Hedge Fund Research (HFR), the leading provider of hedge fund industry data. Total industry assets grew to $1.917 trillion, reflecting a quarterly increase of nearly $149 billion, topping the previous record increase of $140 billion in 2Q07. The year-end figure approaches the historical asset peak of $1.93 trillion set in 2Q08 and represents an asset increase of 44 percent since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10.
Investors continued to increase allocations to the hedge fund industry, committing $13.1 Billion net new capital to hedge funds in 4Q. This figure follows $19 billion of new capital from the prior quarter and brings full-year 2010 net inflows to $55.5 billion, the highest annual total since 2007. In contrast to prior years, falling volatility contributed to a more narrow performance dispersion among hedge fund strategies, with Relative Value Arbitrage gaining +11.7 percent, while Macro strategies posted a gain of +8.6 percent, bounding gains of +11.5 and +10.6 percent for Event- Driven and Equity Hedge strategies, respectively.
Investors exhibited a clear preference for Macro strategies in 4Q, allocating $6.6 Billion of new capital to Macro funds, while Equity Hedge experienced a small net redemption of $620 Million. For the full year, $21.5 billion in new inflows went to Relative Value strategies, with Macro and Event Driven adding $17.3 billion and $14.0 billion. Equity Hedge, the largest strategy area by assets, experienced an increase of $2.6 billion for 2010. Investors allocated $1.8 billion to Funds of Hedge Funds (FOFs) in 4Q10, the second consecutive quarter of inflows for FOFs.
Increasing investor risk tolerance also contributed to a moderation in the concentration of quarterly allocations to the industry’s largest firms. While more than 80 percent of net new assets were allocated to firms with more than $5 billion in AUM for the entire year, only 51.6 percent of inflows went to the industry’s largest firms in 4Q.
Tuesday, January 18, 2011
Are hedge funds all buying the same stocks?
A study of hedge fund performance by Andrew Lo, an MIT researcher, shows that fund returns have been moving more closely together over the past five years, according to a WSJ report.
Lo’s analysis found a roughly 79% chance “any randomly selected pair of hedge funds will move up and down in tandem in a given month from 2006 to 2010.”
A probable reason: they are all buying the same stocks.
Complete article
Lo’s analysis found a roughly 79% chance “any randomly selected pair of hedge funds will move up and down in tandem in a given month from 2006 to 2010.”
A probable reason: they are all buying the same stocks.
Complete article
ILLIQUIDITY PREMIA IN ASSET RETURNS: AN EMPIRICAL ANALYSIS OF HEDGE FUNDS, MUTUAL FUNDS, AND U.S. EQUITY PORTFOLIOS
Amir E. Khandani and Andrew W. Lo•
The authors of this study establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods. The authors also document significant positive return-autocorrelation in portfolios of securities that are generally considered less liquid, e.g., small-cap stocks, corporate bonds, mortgage-backed securities, and emerging-market investments.
Using a sample of 2,927 hedge funds, 15,654 mutual funds, and 100 size- and book-to-market-sorted portfolios of U.S. common stocks, we construct autocorrelation-sorted long/short portfolios and conclude that illiquidity premia are generally positive and significant, ranging from 2.74% to 9.91% per year among the various hedge funds and fixed-income mutual funds.
The authors do not find evidence for this premium among equity and asset-allocation mutual funds, or among the 100 U.S. equity portfolios. The time variation in our aggregated illiquidity premium shows that while 1998 was a difficult year for most funds with large illiquidity exposure, the following four years yielded significantly higher illiquidity premia that led to greater competition in credit markets, contributing to much lower illiquidity premia in the years leading up to the Financial Crisis of 2007--2008.
The authors of this study establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods. The authors also document significant positive return-autocorrelation in portfolios of securities that are generally considered less liquid, e.g., small-cap stocks, corporate bonds, mortgage-backed securities, and emerging-market investments.
Using a sample of 2,927 hedge funds, 15,654 mutual funds, and 100 size- and book-to-market-sorted portfolios of U.S. common stocks, we construct autocorrelation-sorted long/short portfolios and conclude that illiquidity premia are generally positive and significant, ranging from 2.74% to 9.91% per year among the various hedge funds and fixed-income mutual funds.
The authors do not find evidence for this premium among equity and asset-allocation mutual funds, or among the 100 U.S. equity portfolios. The time variation in our aggregated illiquidity premium shows that while 1998 was a difficult year for most funds with large illiquidity exposure, the following four years yielded significantly higher illiquidity premia that led to greater competition in credit markets, contributing to much lower illiquidity premia in the years leading up to the Financial Crisis of 2007--2008.
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