- Advertisement -
- Advertisement -

Related

Steer Away from New Hedge Funds in Times of High Demand

Latest Report

- Advertisement -

Stockholm (HedgeNordic) – Committing capital to a new hedge fund launched in times of high investor demand for hedge fund management is not a good idea, concludes a new research study conducted by three professors from two U.S. universities. The study finds that funds opened during hot markets characterized by high investor demand for hedge funds significantly underperform peer funds already existing in the market, have lower survival rates and exhibit higher operational risk.

Florida State University professor Lin Sun and finance professors Zheng Sun and Lu Zheng from the University of California at Irvine examined the strategic timing behavior of hedge fund companies in a paper titled “Strategic Timing of Hedge Fund Starts.” The findings are based on data retrieved from the Thomson Reuters Lipper Hedge Fund Database, with the study conducted on a sample of 8,630 unique funds operating between January 1994 and December 2014.

Using three different proxies for investor demand for hedge fund management, the researchers observe more hedge fund launches in hot markets than in cold markets characterized by muted hedge fund investor sentiment. There are 25 hedge fund inceptions per month on average in cold markets and 45 inceptions in hot markets when using one of the three proxies to define investor demand. The differences are even larger when using the two other proxies, with 26 and 27 more launches per month in hot markets than in cold markets, correspondingly.

More importantly, the study concludes that hedge funds opened during hot markets underperformed the vehicles already existing in the market by 29 basis points to 48 basis points per month, corresponding to a difference of 3.5 percent to 5.8 percent in annualized returns over a fund’s lifetime. In addition, funds opened in hot markets have a shorter life span and exhibit significantly lower survival rates than the funds opened in cold markets in the first two to three years after inception. This implies hedge fund companies tend to open low-quality funds during hot markets.

Beyond delivering underperformance, hedge funds opened in hot markets also exhibit higher operational risk, which reflects a wide range of variables such as fees, reporting practices, auditing practices, personal capital invested, among other things. In conclusion, the researchers find that “funds opened in hot markets with high sentiment experience poor future performance, survive shorter lives, and exhibit greater operational risk.” “The timing behavior of hedge fund companies is not in the best interest of investors,” the researchers add.

 

Picture: (c) Ollyy—shutterstock.com

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

Latest Articles

Avanto Right Tail Crosses 100% Since Inception

Lars Mikelsen, portfolio manager of Avanto Right Tail, runs a strategy designed to capture extreme upside events through concentrated bets on themes such as...

Nordic Hedge Funds Extend Solid Run Through Summer

Nordic hedge funds continued their strong run since May, closing out the summer on a positive note with an average gain of 0.5 percent...

Pasi Havia Bids Farewell to HCP, Quant Strategy Carries On

After more than a decade at Helsinki Capital Partners (HCP), portfolio manager Pasi Havia has stepped down from his role, leaving behind the management...

Fresh Talent, New Funds: ALCUR Expands Reach in Retail Segment

After a wave of portfolio manager hires earlier this year, stock-picking fund boutique ALCUR Fonder is preparing to launch several new funds aimed at...

Quirky Questions for Kathryn Kaminski (AlphaSimplex)

Not every hedge fund conversation needs to revolve around performance charts or trade execution. In HedgeNordic’s Quirky Questions series, we look beyond the strategies to the...

Active Decisions in Passive Wrappers: Othania on ETF Innovation

Founded in early 2016 by brothers Vincent Dilling-Larsen and Christian Mørup-Larsen, Danish fund boutique Othania built its foundation on a proprietary risk model, “Tiger,”...

Allocator Interviews

In-Depth: High Yield

Voices

Request for Proposal

- Advertisement -
HedgeNordic
Privacy Overview

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.