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Session Overview
FIIE-1: Hedge Funds
Thursday, 24/Aug/2017:
8:30am - 10:00am

Session Chair: Elvira Sojli, University of New South Wales
Location: O148

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Public Hedge Funds

Lin Sun, Melvyn Teo

Singapore Management University

Discussant: Elvira Sojli (University of New South Wales)

Hedge funds managed by listed firms significantly underperform funds managed by unlisted firms. We argue that since the new shareholders of a listed management company typically do not invest alongside the limited partners of the funds managed, the process of going public breaks the incentive alignment between ownership, control, and investment capital, thereby engendering agency problems. In line with the agency explanation, the underperformance is more severe for funds that have low manager total deltas, low governance scores, and no manager personal capital, or that are managed by firms whose stock prices are more sensitive to earnings news. Post IPO, listed firms aggressively raise capital by launching multiple new funds. Consequently, despite the underperformance, listed firms harvest greater fee revenues than do comparable unlisted firms. Investors continue to subscribe to hedge funds managed by listed firms as they appear to offer lower operational risk.

EFA2017-378-FIIE-1-Sun-Public Hedge Funds.pdf

How Smart is Institutional Trading?

Jingi Ha, Jianfeng Hu

Singapore Management University

Discussant: Charles Trzcinka (Indiana University)

We estimate daily aggregate order flow at the stock level from all institutional investors as well as for hedge funds and the other institutions separately. We achieve this by extrapolating the relation between quarterly institutional ownership in 13F filings, aggregate market order imbalance in TAQ, and a representative group of institutional investors' transaction data. We find that the estimated institutional order imbalance has positive price impact in the short term, which reverses in the long term. The "smart" order flow from hedge funds generates greater and more persistent price impact than the "dumb" order flow from all the other institutions. We also find that hedge funds trade on well known anomalies around month ends while the other institutions do not.

EFA2017-597-FIIE-1-Ha-How Smart is Institutional Trading.pdf

Limits of Arbitrage under the Microscope: Evidence from detailed Hedge Fund Transaction Data

Bastian von Beschwitz1, Sandro Lunghi2, Daniel Schmidt3

1Federal Reserve Board; 2Inalytics; 3HEC Paris

Discussant: Petri Jylhä (Aalto University)

Using detailed data on the trades and portfolio holdings of long-short equity hedge funds, we examine the differences between trades related to long and short positions. We find that long buys and short sells are informed, but that long sells and short buys are uninformed. In fact, it is possible to generate significant alphas by taking the opposite trades to long sells and short buys implying that hedge funds close their positions too early and "leave money on the table". Furthermore, while hedge funds trade on momentum when establishing both long and short positions, follow-up orders exhibit momentum only for shorts and are contrarian for longs. We argue this comes from hedge funds’ desires to keep their position sizes stable. We also find that short positions are kept open shorter than long positions.

EFA2017-412-FIIE-1-von Beschwitz-Limits of Arbitrage under the Microscope.pdf

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