Showing papers in "The Journal of Alternative Investments in 2001"
TL;DR: In this paper, the sources of potential return benefits are reviewed including the impact of commodity volatility on convenience yield, and the impact on convenience yields of commodity investments during the 1990s.
Abstract: While various commodity investments performed poorly during the 1990s, in the latter part of the decade, various commodities experienced improved return performance. In this paper, the sources of potential return benefits are reviewed including the impact of commodity volatility on convenience yield.
105 citations
TL;DR: In this article, a derivative structure that can induce an upward bias in the measurement of the Sharpe ratio is described, which smoothes observed returns and lowers observed volatility without significantly altering the annual return.
Abstract: The Sharpe ratio is a commonly used measure of return/risk performance. However, the Sharpe ratio is susceptible to gaming by managers. This article describes a derivative structure that can induce an upward bias in the measurement of the Sharpe ratio. The structure accomplishes this by shifting returns from the highest monthly return each year to the lowest one. This smoothes observed returns-and lowers observed volatility-without significantly altering the annual return. The objective of the article is to demonstrate how adding derivatives can appear to improve risk-adjusted return without actually doing so.
89 citations
TL;DR: This paper illustrates a new approach to evaluating portfolios in the context of multiple performance measures based upon linear programming techniques and identifies the n-dimensional efficient portfolio frontier.
Abstract: This paper illustrates a new approach to evaluating portfolios in the context of multiple performance measures. The approach is based upon linear programming techniques and identifies the n-dimensional efficient portfolio frontier. An illustrative example with commodity trading advisor (CTA) returns shows that benchmarks can be identified for each individual portfolio.
63 citations
TL;DR: In this article, the relationship between firm age and firm performance was investigated and the results showed that firm age was positively associated with fund performance, while market factors which drive fund performance were not.
Abstract: Firm and market factors which drive fund performance are of principal interest to the investing community. This article emphasizes the relationship between firm age and firm performance.
58 citations
TL;DR: This paper presented evidence on the actual drivers of return of hedge fund strategies and how traditional style-based performance analysis and asset allocation frameworks (e.g., mean/variance return/risk optimization) can be used to determine the appropriate allocation to hedge funds.
Abstract: Academic and practitioner research has previously focused on the performance of various hedge fund strategies as stand-alone investments and as part of traditional stock and bond portfolios. In this article evidence is presented on the actual drivers of return of the various strategies and how traditional style-based performance analysis and asset allocation frameworks (e.g., mean/variance return/risk optimization) can be used to determine the appropriate allocation to hedge funds.
56 citations
TL;DR: In this paper, two books are reviewed which offer differing views regarding adding value in financial markets or institutions: Robert Haugen, The Inefficient Stock Market (2nd edition, Pearson Education [2002]) and Emmanuel Acar, ed., Added Value in Financial Institutions (Pearson Education [2001]).
Abstract: In this issue, two books are reviewed which offer differing views regarding adding value in financial markets or institutions: Robert Haugen, The Inefficient Stock Market (2nd edition, Pearson Education [2002]) and Emmanuel Acar, ed., Added Value in Financial Institutions (Pearson Education [2001]).
51 citations
TL;DR: In this paper, the potential benefit of index option-based strategies as well as the unique risk and return distributions that result from these strategies are discussed. But, the results indicate that the returns achieved by actively managed strategies are not necessarily dependent on the unique skills of the managers and that the source of this additional return can be identified and explained by combining a passive stock index investment with a passively managed option portfolio.
Abstract: This study reviews the potential benefit of index option-based strategies as well as the unique risk and return distributions that result from these strategies. The empirical results are based on the replication of passive option-based strategies using daily option data collected over the past thirteen years. These passive benchmarks are then compared to the performance of a number of active managers. The results indicate that many passive investment strategies offered risk-adjusted returns that exceeded the underlying index over the time period studied. Furthermore, the returns to these passive option-based strategies provide useful benchmarks for the performance of the active managers studied. Results presented here demonstrate that the source of this additional return can be identified and explained by combining a passive stock index investment with a passively managed option portfolio. This is important because it demonstrates that the returns achieved by actively managed strategies are not necessarily dependent on the unique skills of the managers.
37 citations
TL;DR: In this paper, the authors used the standard Black-Scholes analysis to determine the value of the call option on hedge fund incentives and discussed how this call option might provide an inconsistent incentive compared to the desires of investors in the hedge fund.
Abstract: One of the ironies of hedge fund investing is that investors can provide conflicting incentives to the hedge fund manager. While hedge fund managers earn a management fee, which is a constant percentage applied to the amount of assets managed in the hedge fund, they receive an incentive fee, which is a form of profit sharing when a profitable return is earned for their investors. The standard Black-Scholes analysis is used to determine the value of the call option on hedge fund incentives. The article also discusses how this call option might provide an inconsistent incentive compared to the desires of investors in the hedge fund.
37 citations
TL;DR: In this paper, an initial attempt to provide some empirical insights and analysis about the Over the Counter Bulletin Board (OTC-BB) market has been made, with the focus on the OTC-BB market.
Abstract: Unknown or little researched equity investment forms a central part of several hedge fund strategies. However, knowledge of the Over the Counter Bulletin Board (OTC-BB) Exchange is widely lacking. This research is an initial attempt to provide some empirical insights and analysis about the OTC-BB market.
20 citations
TL;DR: In this article, the authors review the characteristics of various hedge fund strategies and emphasize the unique structural characteristics of multi-manager hedge funds, in addition to the enhanced risk/return profile of funds of hedge funds.
Abstract: In addition to the enhanced risk/return profile of funds of hedge funds, there are numerous additional structural benefits to investment in multi-manager hedge funds. This article both reviews the characteristics of various hedge fund strategies and emphasizes the unique structural characteristics of multi-manager hedge funds.
19 citations
TL;DR: Defensive investments are defined as those asset classes that have attracted funds during periods of stock market weakness as discussed by the authors, and they are more proactively employed by investors to take advantage of the cause of equity weakness.
Abstract: Defensive investments are defined here as those asset classes that have attracted funds during periods of stock market weakness. Some of these asset classes such as cash, gold, or government bonds benefit most when passive investments take a flight-to-quality. Others are more proactively employed by investors to take advantage of the cause of equity weakness. Taken together, these asset classes make up the category of defensive investments. How well they performed during specific periods of stock market weakness and in general over long investment horizons, is the subject of study of this article.
TL;DR: In this article, the relation between return and volatility in the commodity markets is inverse of that observed in the stock markets, and the implication is that if the commodity market returns are negatively correlated with those of traditional financial assets, the introduction of commodities in those portfolios may result in the diversification of risk.
Abstract: In this article, results indicate that the relation between return and volatility in the commodity markets is inverse of that observed in the stock markets. The implication is that if the commodity market returns are negatively correlated with those of traditional financial assets, the introduction of commodities in those portfolios may result in the diversification of risk. This may also allow fund managers to hedge their investment portfolios with commodities, thus avoiding the use of more complicated instruments such as options.
TL;DR: In this paper, the authors investigated the long-term relationships between the ten largest hedge funds in the Zurich database and four stock market indices over a ten-year period, using time series analysis and cointegration.
Abstract: This article investigates the long-term relationships between the ten largest hedge funds in the Zurich database and four stock market indices over a ten-year period, using time series analysis and cointegration. We find that most of the time series examined contain a single unit root. Our results provide evidence that, in general, hedge funds do not appear to track any of the specific benchmarks used in this study. Future research will emphasize more style pure hedge funds with associated indices.
TL;DR: A recent book, Hedge Funds in Emerging Markets by Gordon de Brouwer (reviewed by Greg N. Gregoriou), and a recent academic article, “Measuring the Market Impact of Hedge Funds” by William Fung and David Hsieh as discussed by the authors address the issue of hedge funds directly impacting financial markets.
Abstract: A recent book, Hedge Funds in Emerging Markets by Gordon de Brouwer (reviewed by Greg N. Gregoriou), and a recent academic article, “Measuring the Market Impact of Hedge Funds” by William Fung and David Hsieh (reviewed by Thomas Schneeweis), address the issue of hedge funds directly impacting financial markets.
TL;DR: In this article, the authors suggest that investors take full advantage of the unique statistical properties of commodity investments in their portfolios by adding commodity assets to a financial-only portfolio as well as taking full advantage the correlation properties of commodities strategies within a commodity only portfolio.
Abstract: It is well documented that the statistical properties of commodities yield important risk-reduction benefits for a portfolio invested mainly in financial assets. It is perhaps less well known that individual commodity strategies can be so uncorrelated that they can significantly dampen the risk of a commodity-only portfolio. In this article, we suggest that investors take full advantage of the unique statistical properties of commodity investments in their portfolios by adding commodity assets to a financial-only portfolio as well as taking full advantage of the correlation properties of commodity strategies within a commodity-only portfolio.
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TL;DR: In this article, two individuals with experience in the area of hedge fund index creation offer their views on the index creation process and their own index product, as well as their own hedge fund this article.
Abstract: While indices are common in the areas of stock and bond investment, in recent years a number of performance indices which track the performance of hedge fund managers have also come into existence. In the following, two individuals with experience in the area of hedge fund index creation offer their views on the index creation process and their own index product.
TL;DR: In this paper, the authors investigated the performance of active currency programs either as an asset class or as an overlay and found that managed currency funds have produced positive returns over the years that are mainly due to the presence of trends in the foreign exchange markets.
Abstract: This article investigates the performance of active currency programs either as an asset class or as an overlay. The authors find that managed currency funds have produced positive returns over the years that are mainly due to the presence of trends in the foreign exchange markets. An active currency overlay program has the potential to beat both hedged and unhedged benchmarks in terms of absolute and risk-adjusted returns
TL;DR: The results of the survey are reported in this article as mentioned in this paper, and the results of a survey conducted by CMRA in 2016 is reported in Table 1 : The survey participants included hedge funds, funds of funds, mutual funds, and traditional money managers.
Abstract: Recent market concerns over pricing in various hedge fund strategies led CMRA to conducted an NAV/Fair Value practices survey. Participants included hedge funds, funds of funds, mutual funds, and traditional money managers. The results of the survey are reported in this article.
TL;DR: In this article, the authors compared the alpha produced by active equity management with another type of alpha-portable alpha-derived from an alternative Commodity Trading Advisor (CTA) investment strategy.
Abstract: Active management of equity portfolios remains the rule rather than the exception. In this report, the alpha produced by active equity management-its magnitude, consistency, risk, and correlation to the underlying equity market-is compared with the another type of alpha-portable alpha-derived from an alternative Commodity Trading Advisor (CTA) investment strategy.
TL;DR: In this article, a review of hedge fund performance under similar economic conditions in the past showed similar results, however, results also show that portfolios using alternative investments are more consistent with future portfolios under a wide range of market environments than portfolios composed only of traditional investments.
Abstract: In recent years, various hedge fund strategies have shown wide swings in returns. In this paper, the authors show that this performance should have been expected. A review of performance under similar economic conditions in the past showed similar results. However, results also show that portfolios using alternative investments are more consistent with future portfolios under a wide range of market environments than portfolios composed only of traditional investments.
TL;DR: In this article, empirical risk and return statistics from physical real estate and financial real estate investments made in the U.S. are compared and contrasted with concurrent returns from bonds, gold, silver, common stocks, commodities, and the rate of inflation.
Abstract: This article reviews empirical risk and return statistics from physical real estate and financial real estate investments made in the U.S. Twenty-seven years of returns from various categories of U.S. real estate are compared and contrasted with concurrent U.S. returns from bonds, gold, silver, common stocks, commodities, and the rate of inflation.
TL;DR: A wide range of academic articles which have explored the basis for as well as the performance of merger arbitrage are reviewed in this paper, where the authors have supported various theories as to the basis of merger activity and the returns derived from various forms of arbitrage.
Abstract: While merger arbitrage has proven itself to provide valuable return to risk properties, academics have supported various theories as to the basis for merger activity and the returns derived from various forms of merger arbitrage In this article, a wide range of academic articles which have explored the basis for as well as the performance of merger arbitrage are reviewed
TL;DR: The authors found that commodity futures provide attractive return patterns while real estate offers little diversification benefits for investors with traditional stock and bond portfolios, and that both commodity and real estate volatility patterns are similar to traditional asset classes.
Abstract: Previous research has shown that returns (and variability of returns) to traditional asset classes are significantly influenced by Federal Reserve monetary policy. Unfortunately, while providing evidence that returns from traditional asset classes are higher and less volatile during expansive monetary policy periods, previous research has not identified asset classes that have attractive return patterns in restrictive monetary policy periods. This analysis extends that research into broad alternative investment classes including several real estate and commodity indexes. The results indicate that commodity futures provide attractive return patterns while real estate offers little diversification benefits for investors with traditional stock and bond portfolios. Both commodity and real estate volatility patterns are found to be similar to traditional asset classes—higher volatility in restrictive monetary policy periods.
TL;DR: This paper pointed out some of the problems in perception of hedge funds as an alternative investment including that hedge funds should not be viewed in the same vein as traditional assets; that is, as a benchmark-driven investment.
Abstract: Hedge funds are often described as an alternative asset. In fact, hedge funds are not an alternative to traditional stock and bond investments in that they replace existing traditional investments but are complementary because they offer unique risk and return opportunities when combined with traditional assets. The author points out some of the problems in perception of hedge funds as an alternative investment including that hedge funds should not be viewed in the same vein as traditional assets; that is, as a benchmark-driven investment.
TL;DR: In this article, two books are reviewed which offer differing views regarding adding value in financial markets or institutions: Robert Haugen, The Inefficient Stock Market (2nd edition, Pearson Education [2002]) and Emmanuel Acar, ed., Added Value in Financial Institutions (Pearson Education [2001]).
Abstract: In this issue, two books are reviewed which offer differing views regarding adding value in financial markets or institutions: Robert Haugen, The Inefficient Stock Market (2nd edition, Pearson Education [2002]) and Emmanuel Acar, ed., Added Value in Financial Institutions (Pearson Education [2001]).
TL;DR: In this article, the authors report on a new class of derivative products that they refer to as equity-linked savings products, which require investors to pay periodic installments in return for a predefined equitylinked payoff at maturity.
Abstract: In this first part of a two-part article, the author reports on a new class of derivative products that he refers to as equity-linked savings products. Equity-linked savings products require investors to pay periodic installments in return for a predefined equity-linked payoff at maturity. The structuring, hedging, pricing and marketing of a variety of equity-linked savings products are discussed in detail, paying particular attention to the case of The Netherlands where equity-linked savings products are currently very popular with an estimated USD 2 billion issued over the last three years. Reverse engineering of a recent issue shows that the profit margins that product providers may be able to achieve on equity-linked savings products are extremely high.
TL;DR: In this article, the authors discuss the benefits as well as the challenges both hedge funds and the prime broker experience in order to support the continued growth of the hedge fund industry, including issues surrounding transparency, capacity, and liquidity.
Abstract: The authors discuss the benefits as well as the challenges both hedge funds and the prime broker experience in order to support the continued growth of the hedge fund industry. Issues surrounding transparency, capacity, and liquidity are considered. These challenges are similar to the ones the traditional fund industry faced during the last two decades.
UBS1
TL;DR: In this article, the authors look at where CDO equity cash flows come from and how to evaluate them and then do a brief review of relative attractiveness of equity cash flow backed by different collateral.
Abstract: CDOs have grown to be an important part of the asset-backed securities market, accounting for some 15% of new issuance. In this article we look at where CDO equity cash flows come from and how to evaluate them. We then do a brief review of relative attractiveness of equity cash flows backed by different collateral.
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TL;DR: In this paper, the authors extend the intuition of Schneeweis and Spurgin by showing the market-based factors that could be driving the value of α. But they do not discuss the non-statistical characteristics that could lead to being an inconsistent evaluator of performance.
Abstract: This article is an attempt to extend the intuition of Schneeweis and Spurgin by showing the “market based” factors that could be driving the value of α. To motivate this discussion, the author used a simple problem that is frequently discussed in introductory investment classes. Because Schneeweis and Spurgin have fully discussed the statistical characteristics, the approach taken herein is to examine the nonstatistical factors that could lead to being an inconsistent evaluator of performance. Although the conclusion is consistent with Schneeweis and Spurgin, it is argued that the mere existence of α suggests that it should not be used. That is, economic agents should behave rationally and eliminate mispricing so that it should not exist. In a way, it9s like the “Salem witch-hunt”: the discovery of its innocence inevitably kills it.