The Performance of the Hedge Fund Industry
New research reveals that the performance of the hedge fund industry has not been as bad as the results from studies that relied on hedge fund data providers.
Is Sector Neutrality in Factor Investing a Mistake?
The justification for neutralizing sectors in factor strategies is a work in progress. To date, academic researchers haven't had an empirical model to mimic the impact of removing sector "effects" on the measurement and performance of factor strategies. The authors develop and test a two-component model to address the question of, "Is Sector Neutrality in Factor Investing a Mistake?"
Minimizing the Risk of Cross-Sectional Momentum Crashes
While the empirical research on cross-sectional (long-short) momentum has shown that returns have been high, investors have also experienced huge drawdowns—momentum exhibits both high kurtosis and negative skewness. Since 1926 there have been several momentum crashes that featured short, but persistent, periods of highly negative returns. For example, from June to August 1932, the momentum portfolio lost about 91%, followed by a second drawdown from April to July 1933.
Fee Variation in Private Equity
Given the significant growth of investment in private markets, there have been increasing demands for greater transparency in the operation and structure of private market funds. This paper aims to address questions such as whether fees are set uniformly within most funds, and if not, by how much do they vary.
Valuing Artificial Intelligence (AI) Stocks
While there is literature that describes the "domain" of artificial intelligence, there are very few, if any that analyze the valuation and pricing of AI stocks. The authors attempt to fill the void with a two part methodology.
Economic Momentum
Strong empirical evidence demonstrates that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models.
Personality Differences and Investment Decision-Making
This study offers valuable information to provide insights into the underlying mechanisms driving investment behavior. For example, recognizing the impact of Neuroticism on belief formation and risk perception can help explain why some investors exhibit greater aversion to stock market volatility. Similarly, understanding how Openness influences risk preferences can shed light on why certain individuals are more willing to take investment risks than others.
Tracking Error is a Feature, Not a Bug
The benefits of diversification are well known. In fact, it’s been called the only free lunch in investing. Investors who seek to benefit from diversification of the sources of risk and return of their portfolios must accept that adding unique sources of risk means that their portfolio will inevitably experience what is called tracking error—a financial term used as a measure of the performance of a portfolio relative to the performance of a benchmark, such as the S&P 500.
Short Campaigns by Hedge Funds
Our analysis highlights the importance of short campaigns for understanding the economic impact of activist hedge funds.
Breaking Bad Momentum Trends
In their two papers, Goulding, Harvey, and Mazzoleni showed that observed market corrections and rebounds carry predictive information about subsequent returns and showed how that information could be utilized to enhance the performance of trend-following strategies by dynamically blending slow and fast momentum strategies based on four-state cycle-conditional information.
Private Equity Performance Around the Globe
This study provides valuable insights into how private equity performs in regions outside North America, reflecting broader trends in global investment.
Betting on a Short Squeeze as Investment Strategy
Short squeezes are often associated with a large positive jump in the price of a stock. Filippou, Garcia-Ares, and Zapatero demonstrated that skewness-seeking investors try to identify securities that could experience a short squeeze in the near future and are willing to pay a premium for them. That results in an overvaluation of the options and, on average, negative returns. Investors are best served to avoid investments with lottery-like distributions. One way to do that is to turn a blind eye to social media sites like Robinhood and Reddit so you don’t get caught up in the hype and excitement. That’s another example of why retail investors are called “dumb money.” Forewarned is forearmed.
Robo-advisors: A well-researched topic
Along with the rapid growth in the utilization of robo-advisors, there has been similar growth in academic interest about robo-advisors. What is the current state and what are the main research streams in the literature?
Cut Your Losses and Let Profits Run?
Be careful before acting on what is considered to be conventional wisdom. Make sure it’s supported by empirical evidence. In this case, the evidence makes clear that “cut your losses and let your profits run” should not be conventional wisdom.
Financial Literacy and Financial Resilience: Evidence from Italy
The paper aims to contribute to the literature by providing insights into the current state of financial literacy in Italy, its implications for financial well-being and resilience, and the demographic disparities therein.
Lottery Preference and Biotech Stocks: Trust the Financials, Not the Science
Making a bet on biotech/pharma firms that have not yet achieved significant revenue is the equivalent of buying a lottery ticket—with the same poor risk/return relationship.
Self-Declared Benchmarks and Fund Manager Intent: “Cheating” or Competing?
The paper aims to provide insights into the dynamics of benchmark selection, the effectiveness of Relative Performance Evaluation ( RPE ) incentivization, and the broader implications for fund performance and market competition.
On the Persistence of Growth and Value Stocks
While analysts underwrite high growth for companies that have grown quickly and slow growth for companies that have grown slowly in the past, a large body of evidence demonstrates that reversion to the mean of both positive and negative abnormal earnings growth is the norm.
Can ChatGPT Improve Your Stock Picks?
One use of the NLP (natural language processing) features of ChatGPT is to search out patterns in the immense amounts of news, data and other sources of information about specific stocks, and then efficiently convert them into summaries valuable for all types of investors. Can this be accomplished with useful results? The authors use the Q2_2023 period to test performance around earnings announcements. Earnings announcements and earnings surprises are informationally rich as well as challenging events for investors to analyze.
Band of Brothers Attacking Short Sellers: Game Stop for Hedge Funds
Advisors and investors should be aware that fund families that invest systematically have found ways to incorporate the research findings on the limits to arbitrage and the evolving changes we have discussed to improve returns over those of a pure index replication strategy. It seems likely this will become increasingly important, as the markets have become less liquid, increasing the limits to arbitrage and allowing for more overpricing.