Investing in talents mager characteristics and hegde fund performance
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Investing in talents mager characteristics and hegde fund performance
Investing in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance s School of Business. University of Michigan. Ann Arbor. MI 4S109. *Zhang is from the Johnson Graduate School of Management. Cornell University. Ithaca. NY 14853. cZhao is from BlackRock Inc.. 40 East 52nd Street. New York. NY 10022. We thank Andrew Ang. Warren Bailey. Lauren Cohen. Jed Devarn. Ravi Investing in talents mager characteristics and hegde fund performance Jagannathan. Wei Jiang. Maureen O'Hara. Gideon Saar. Clara Vega, and seminar participants at Columbia University. Cornell University, and the UniversInvesting in talents mager characteristics and hegde fund performance
ity of Wisconsin at Milwaukee for helpful comments. We thank David Hsieh for making the lookback straddle returns available on his Web site and Ken FrInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance https.//ssm.com/abstract=990753Investing in Talents: Manager Characteristics and Hedge Fund PerformancesAbstractUsing a large sample of hedge fund manager characteristics, we provide one of the first comprehensive studies on the impact of manager characteristics, such as education and career concer Investing in talents mager characteristics and hegde fund performance n, on hedge fund performances. We document differential ability among hedge fund managers in generating risk-adjusted returns and flow-chasing-returnInvesting in talents mager characteristics and hegde fund performance
behaviors among hedge fund investors. In particular, we find that managers from higher-SAT undergraduate institutes tend to have higher raw and risk-aInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance l theory of active portfolio management of Berk and Green (2004). However, in contrast to the results for mutual funds, we find a rather symmetric relation between hedge fund flows and past performance, and that hedge fund flows do not have a significant negative impact on future performance.JEL: G2 Investing in talents mager characteristics and hegde fund performance 3. Gil, G12.Keywords: hedge fund performance, manager characteristics, hedge fund flows.Electronic copy available at. https://ssm.com/abstract=990753AInvesting in talents mager characteristics and hegde fund performance
n investment in a hedge fund is really an investment in a manager and the specialized talent he possesses to capture profits from a unique strategy. SInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance SEC and various hedge fund research companies, the amount of assets under management by hedge funds has grown from about Si-5 billion in 1990 to about $1 trillion by the end of ‘2004. and the number of existing hedge funds is about 7.000 to 8.000. Some industry experts even predict that hedge fund Investing in talents mager characteristics and hegde fund performance assets could exceed $3.2 trillion globally by 2009. As a result, hedge funds have attracted enormous attention from a wide range of marker participantInvesting in talents mager characteristics and hegde fund performance
s and academics in recent years.Hedge funds differ from mutual funds in rhe ways they operate and how their managers are compensated. For example, hedInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance t, hedge funds frequently use short selling, leverage, and derivatives, strategies rarely used by mutual funds, to enhance returns and/or reduce risk. While mutual funds charge a management fee proportional to assets under management (usually 1-2%). most hedge funds charge an incentive fee. typicall Investing in talents mager characteristics and hegde fund performance y 15% to 20% Of profits, in addition to a fixed 1-2% management fee. Moreover, hedge fund managers often invest a significant portion of their personaInvesting in talents mager characteristics and hegde fund performance
l wealth in the funds they manage: and many funds have a high watermark provision, which requires managers to recoup previous losses before receiving Investing in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance (2005) in a recent n'all Street Journal commentary, while mutual funds enable small investors to pool their money and invest in diversified portfolios, "a hedge fluid is a vehicle for acquiring the specialized talents of its manager.” Grossman observes that. "Hedge funds are typically managed by an Investing in talents mager characteristics and hegde fund performance entrepreneur, and hedge fund returns are the outcome of an entrepreneur activity.’' As a result. Grossman emphasizes that a "fluid's return will be nInvesting in talents mager characteristics and hegde fund performance
o better than its management and the economic environment in which it produces, its product. An investor should understand the product being produced Investing in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance s it follows and the talents of its managcr(s) in implementing such strategies.Though great progress has been made in understanding the risk and return properties of many hedge fund strategies.1 only limited analysis has been done on the impact of manager talents on hedge fund performances in the li Investing in talents mager characteristics and hegde fund performance terature. Just like any entrepreneur activity, it is entirely possible ’See. for example, rhe interesting works of Agarwal and Naik (2004). Fung and HInvesting in talents mager characteristics and hegde fund performance
sieh (1997, 2001). and Mitchell and Pulvino (2001). among others.1Electronic copyat: https://ssm.com/abstract=990753https://khothuvien.cori!that some Investing in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance ndowments, and other institutional investors each year, identifying manager characteristics that lead to superior performance could be very helpful to potential investors in selecting hedge fund managers and also could have profound welfare implications.In addition to the practical value of identify Investing in talents mager characteristics and hegde fund performance ing superior managers, understanding the impact of manager talents on hedge fund performances also provides a way of testing some of the assumptions aInvesting in talents mager characteristics and hegde fund performance
nd implications of the rational theory of active portfolio management of Berk and Green (2004)? For example, one important assumption of Berk and GreeInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance (2004) is true, then it could be difficult to identify cross-sectional differences in risk-adjusted returns in equilibrium using mutual fund data, because most mutual funds might have increased their sizes to the extent that their risk-adjusted returns have disappeared. Moreover. due to established Investing in talents mager characteristics and hegde fund performance investment process and team-oriented approach to portfolio management in many mutual fund families, the impact of individual managers on mutual fundInvesting in talents mager characteristics and hegde fund performance
performances is likely to be small as well. Consistent with this view. Chevalier and Ellison (1999a) find that although mutual fund managers from highInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance ure of hedge funds suggests that manager talents might be more important for hedge fund performances. Since a significant part of hedge fund compensation comes from incentive fees, hedge fund managers may not want to grow their funds to the extent that all risk-adjusted returns disappear. In additio Investing in talents mager characteristics and hegde fund performance n, many hedge funds have a high watermark provision, and many hedge fund managers have personal wealth invested in their funds. As a result, inferiorInvesting in talents mager characteristics and hegde fund performance
hedge fund returns could be really costly for these managers. Therefore, even in equilibrium there might be an optimal fund size at which abnormal retInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance on individual managers. Therefore, hedge fund data provide a unique opportunity for testing the theory of Berk and Green (2004).In this paper, we provide a comprehensive empirical analysis of the impact of manager characteristics on hedge fund performances. We conjecture that everything else equal, Investing in talents mager characteristics and hegde fund performance a manager who is more talented and more devoted to his/her job is more likely to have better performance. We use intelligence and education as proxiesInvesting in talents mager characteristics and hegde fund performance
for manager talents. We use manager career concern as 2Berk and Green's (2004) model combines three elements: competitive provision of capital by invInvesting in Talents: Manager Characteristics and Hedge Fund PerformancesHaitao Lia. Xiaoyan Zhang*, and Rvi Zhaoc39508ữLi is from rhe Stephen M. Ross Investing in talents mager characteristics and hegde fund performance ties, and learning about managerial ability from past returns. The theory predicts that mutual fund managers increase the size of their funds, and their awn compensation. to the point at which expected returns tn investors do not outperform passive benchmarks in equilibrium.2Electronic copy availabl Investing in talents mager characteristics and hegde fund performance e at. https://ssm.com/abstract=990753https://khothuvien.cori!a proxy for manager job commitments. The rationale is that a manager who is under pressurInvesting in talents mager characteristics and hegde fund performance
e to establish his/her career at an early stage might be willing to put in more effort than a more established manager.We first construct probably theGọi ngay
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