Does Past Performance Affect Risk Taking by Brazilian Hedge Funds?

2009 ◽  
Author(s):  
Rogério Gonçalves Pilotto ◽  
William Eid Jr.
Keyword(s):  
Risk Taking ◽  
Hedge Funds ◽  
Past Performance

Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011 ◽  
Vol 46 (4) ◽  
pp. 1073-1106 ◽  
Author(s):  
Yong Chen
Keyword(s):  
Risk Reduction ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Market Risk ◽  
Risk Shifting ◽  
Large Sample ◽  
Event Risk ◽  
Market State ◽  
Fund Industry

AbstractThis paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

scholarly journals Opacity in Hedge Funds: Does it Create Value for Investors and Managers?

2020 ◽  
Vol 17 (6) ◽  
pp. 640-668
Author(s):  
Flávia Januzzi ◽  
Aureliano Bressan ◽  
Fernando Moreira
Keyword(s):  
Value Creation ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Portfolio Allocation ◽  
Positive Relation ◽  
Monthly Basis ◽  
Comprehensive Database ◽  
Performance Fees

This paper investigates if opacity (as measured by derivatives usage) creates value for investors and the managers of hedge funds that charge performance fees. Since we do not identify a positive relation between opacity and managers’ revenue, it is not possible to state that opacity is a source of manager’s value creation for hedge fund investors and managers. However, considering that opacity is positively associated with risk-taking and negatively related with investors’ adjusted returns, we suggest policies aiming at protecting investors, especially those less qualified. We examine a unique and comprehensive database related to the positions in derivatives taken by managers, which was enabled due to specific disclosure regulatory demands of the Brazilian Securities Exchange Commission, where detailed information on hedge funds’ portfolio allocation should be provided on a monthly basis.

Compensation and Incentives in Hedge Funds

2017 ◽  
Author(s):  
Garrett C. C. Smith ◽  
Gaurav Gupta
Keyword(s):  
Risk Taking ◽  
Hedge Funds ◽  
Bargaining Power ◽  
Hedge Fund ◽  
High Water ◽  
Fund Managers ◽  
Fee Structure ◽  
Relative Bargaining Power ◽  
Structure Research ◽  
Subsequent Risk

Although hedge funds typically report a 2 and 20 fee structure, some investors want to change this standard practice. Many funds sustained substantial losses as a result of the financial crisis of 2007–2008. Given the strategies used by hedge funds, they were not supposed to incur large losses. Subsequent underperformance to equity during the bull market recovery left many investors questioning the fee structure. Research shows the fee structure is more fluid than typically reported. The reluctance of many hedge fund managers to appear weak perpetuates the reported 2 and 20 fee structure. Fees respond to the relative bargaining power between managers and investors. Some investors speculate that the fee structure encourages managers to undertake high-risk strategies. However, fees and other incentive provisions, such as a high-water mark, provide better opportunities for talented managers to enter the industry, mitigating their subsequent risk-taking.

Hedge Funds and Limited Partnership Agreements

2021 ◽  
pp. 86-110
Author(s):  
Na Dai
Keyword(s):  
Financial Crisis ◽  
Current Literature ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
2008 Financial Crisis ◽  
Limited Partnership ◽  
Fund Managers ◽  
The 2008 Financial Crisis

Due to the lack of regulations in the hedge fund industry and the great discretion given to hedge fund managers during the daily operations, limited partnership agreements are the most important if not the only tool for investors to incentivize and monitor hedge fund managers and protect their own interests. This chapter reviews the current literature on hedge funds contractual terms and their implications for fund performance and risk taking, before discussing the variation of the contracts conditional on the jurisdiction of the hedge fund. Finally, the development of hedge funds limited partnership agreements is investigated as many jurisdictions have imposed new regulations on hedge funds after the 2008 financial crisis.

scholarly journals The Valuation of Hedge Funds’ Equity Positions

2016 ◽  
Vol 51 (3) ◽  
pp. 1013-1037 ◽  
Author(s):  
Gjergji Cici ◽  
Alexander Kempf ◽  
Alexander Puetz
Keyword(s):  
Hedge Funds ◽  
Price Volatility ◽  
Equity Valuation ◽  
Security Prices ◽  
Past Performance ◽  
Underlying Stocks

AbstractWe provide evidence on the valuation of equity positions by hedge funds. Reported valuations deviate from standard valuations based on closing prices from the Center for Research in Security Prices for roughly 7% of the positions. These equity valuation deviations are positively related to illiquidity and price volatility of the underlying stocks. They respond to past performance and intensify after an advisor starts reporting to a commercial database. Furthermore, advisors with more valuation deviations show a stronger discontinuity in their reported returns around 0, manage a higher fraction of potentially fraudulent funds, report smoother returns, and exhibit an upward spike in their December reported returns.

scholarly journals Institutional Investors, Past Performance, and Dynamic Loss Aversion

2009 ◽  
Vol 44 (1) ◽  
pp. 155-188 ◽  
Author(s):  
Paul G. J. O’Connell ◽  
Melvyn Teo
Keyword(s):  
Risk Taking ◽  
Loss Aversion ◽  
Institutional Investors ◽  
Disposition Effect ◽  
Past Performance ◽  
Increase Risk ◽  
Reduce Risk ◽  
Proprietary Database ◽  
Dynamic Loss ◽  
Gains And Losses

AbstractUsing a proprietary database of currency trades, this paper explores the effects of trading gains and losses on risk-taking among large institutional investors. We find that institutional investors, unlike individuals, are not prone to the disposition effect. Instead, institutions aggressively reduce risk following losses and mildly increase risk following gains. This asymmetry is more pronounced later in the calendar year and among older and more experienced funds. We show that such performance dependence is consistent with dynamic loss aversion (Barberis, Huang, and Santos (2001)) and overconfidence. In addition, prior institutional gains and losses have palpable implications for future prices.

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