Who Needs Hedge Funds? A Copula-Based Approach to Hedge Fund Return Replication

Affiliation with a financial conglomerate may provide hedge funds with superior information about the conglomerate’s lending, investment banking, and brokerage clients; such affiliation can also lead to potential conflicts with the other units of the conglomerate and exacerbate the conflict between hedge fund companies and hedge fund investors. We find that affiliated funds significantly underperform unaffiliated funds. A difference-in-difference analysis confirms the negative relation between financial industry affiliation and hedge fund performance. Affiliated funds pursue asset-gathering strategies, overweight their conducted initial public offerings/seasoned equity offerings clients’ stocks, are more likely to commit legal and regulatory violations, and tend to exhibit a greater number of internal conflicts. Our results are consistent with conflict of interest exerting a negative impact on the performance of affiliated hedge funds. However, it is possible that lack of skill also contributes to the underperformance of affiliated funds. This paper was accepted by Karl Diether, finance.

Download Full-text

Tax Optimization of Hedge Funds

10.1093/oxfordhb/9780198840954.013.6 ◽

2021 ◽

pp. 488-504

Author(s):

Francois-Serge Lhabitant

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Tax Exempt ◽

Legal Structures ◽

As If

This chapter discusses the major legal structures available for hedge fund investing, and how different categories of investors— taxable US investors, tax-exempt US investors, and non-US investors—may use these to reduce the risk of double or triple taxation. Although sometimes complex, these structures allow investors to enjoy the benefits of characteristics inherent in hedge fund investments while being taxed as if they owned the same assets directly.

Download Full-text

The Secondary Market for Hedge Funds and the Closed Hedge Fund Premium

SSRN Electronic Journal ◽

10.2139/ssrn.1106654 ◽

2010 ◽

Cited By ~ 6

Author(s):

Tarun Ramadorai

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Secondary Market

Download Full-text

HEDGE FUNDS: RISK AND PERFORMANCE

Journal of Financial Management Markets and Institutions ◽

10.1142/s2591768418500034 ◽

2018 ◽

Vol 06 (01) ◽

pp. 1850003

Author(s):

SANGHEON SHIN ◽

JAN SMOLARSKI ◽

GÖKÇE SOYDEMIR

Keyword(s):

Risk Factors ◽

Hedge Funds ◽

Factor Model ◽

Explanatory Power ◽

Hedge Fund ◽

Investment Strategy ◽

Time Varying ◽

Asset Class ◽

And Performance ◽

Fund Portfolio

This paper models hedge fund exposure to risk factors and examines time-varying performance of hedge funds. From existing models such as asset-based style (ABS)-factor model, standard asset class (SAC)-factor model, and four-factor model, we extract the best six factors for each hedge fund portfolio by investment strategy. Then, we find combinations of risk factors that explain most of the variance in performance of each hedge fund portfolio based on investment strategy. The results show instability of coefficients in the performance attribution regression. Incorporating a time-varying factor exposure feature would be the best way to measure hedge fund performance. Furthermore, the optimal models with fewer factors exhibit greater explanatory power than existing models. Using rolling regressions, our customized investment strategy model shows how hedge funds are sensitive to risk factors according to market conditions.

Download Full-text

Determinants of Hedge Fund Internal Controls and Fees

The Accounting Review ◽

10.2308/accr.2010.85.6.1887 ◽

2010 ◽

Vol 85 (6) ◽

pp. 1887-1919 ◽

Cited By ~ 19

Author(s):

Gavin Cassar ◽

Joseph Gerakos

Keyword(s):

Hedge Funds ◽

Agency Costs ◽

Hedge Fund ◽

Short Selling ◽

Internal Controls ◽

Fund Managers ◽

Asset Value ◽

Net Asset Value ◽

Financial Misstatements ◽

Financial Misstatement

ABSTRACT: We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information about their investment positions by implementing weaker internal controls. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

Download Full-text