Hedge Funds and Financial Markets (eBook)

Julian Holler was a research assistant at the Center for Banking and Finance at the University Giessen (Prof. Dr. Wolfgang Bessler). He works as a consultant focusing on energy and commodity markets in Frankfurt a.M.

Foreword 6
Preface 8
Short Contents 9
Contents 10
List of Figures 18
List of Tables 20
Abbreviations 22
Introduction 25
Part I. Hedge Funds from an Asset Management Perspective 32
Chapter I. Hedge Funds and their Trading Strategies 34
A. The Legal and Contractual Structure of Hedge Funds 34
I. Regulation and Legal Structure 34
II. Incentive Structure 35
III. Lock-Up Arrangements 37
IV. Prime Brokerage 38
B. The Trading Strategies of Hedge Funds 39
I. Directional strategies 39
II. Relative Value Strategies 42
III. Event-Driven Strategies 45
C. Summary 47
Chapter II. The Portfolio Benefits of Hedge Funds as an Alternative Asset Class 48
A. The Statistical Properties of Hedge Fund Returns 49
I. The Distribution of Hedge Fund Returns 49
II. Biases in Hedge Fund Data 52
B. Methods for Analyzing Hedge Funds’ Performance 55
I. Investor Preferences for Higher Order Moments 56
II. Multi-Factor Models 59
III. Performance Measurement Ratios 64
IV. Measurement of Performance Persistence 67
C. Risk-Adjusted Performance of Hedge Funds 69
I. Investment Skills of Hedge Fund Managers compared to Mutual Fund Managers 69
II. Determinants of the Cross-Section of Hedge Funds Performance 73
III. Summary 79
D. Diversification, Correlation Risk and Exposures to Alternative Risk Factors 80
I. Analysis for Individual Strategies 80
II. Analysis for the Aggregate Hedge Fund Universe 84
III. Summary and Conclusion 86
E. Summary and Conclusion 87
Chapter III. Hedge Funds and other Alternative Investments in Portfolio Choice 89
A. Alternative Methods for Portfolio Construction 90
I. Mean Variance Analysis 91
II. Higher-Moment Asset Allocation Models 94
B. Optimal Allocations to Hedge Funds and other Alternative Investments 97
I. Optimal Allocations to Hedge Funds based on Mean-Variance Analysis 97
II. Optimal Allocations to Hedge Funds and Higher Order Moments 99
III. Comparison of Optimal Allocations with other Alternative Investments 101
IV. Summary and Conclusion 102
C. Strategic Asset Allocations for Long-Term Investors and Hedge Funds 104
I. Strategic vs. Tactical Asset Allocation 105
II. Strategic Allocations of Hedge Funds 106
III. Tactical Asset Allocation with Hedge Funds 108
IV. Summary and Conclusion 110
D. Hedge Fund Investments from the Perspective of Different Investor Types 110
I. Suitability for different Types of Institutional Investors 110
II. Suitability for Retail Investors 117
E. Conclusion 118
Chapter IV. Hedge Funds in Different Financial Market Environments 119
A. Methodology 121
I. Bayesian Asset Allocation Framework 121
II. Mean-Variance Spanning Tests 122
B. Data 123
I. Asset Classes 123
II. Definition of Different Market Environments 126
C. Optimal Allocation in Hedge Funds – Full Period 127
I. Risk and Return over the Full Sample Period 128
II. Efficient Frontiers and Optimal Asset Allocations 130
III. Spanning Tests 131
D. Hedge Fund Investments in Different Market Environments 133
I. Risk and Return over Time Time-Varying Investment Opportunities 133
II. Efficient Frontiers and Optimal Allocations in Upand Down-Markets 137
III. Spanning Tests for different Market Environments 142
IV. Summary 144
E. Conclusion 146
Part II. The Impact of Hedge Funds on Corporate Governance System 147
Chapter I. Hedge Fund Activism and Corporate Governance 148
A. An Overview of Corporate Governance Mechanisms 148
B. Hedge Fund Approach to Corporate Control 150
I. Comparative Advantages in Activism and Monitoring 151
II. Hedge Fund Approach to exert Control 153
C. Monitoring of Managerial Moral Hazard 155
I. Adjustments of Firm-level Corporate Governance 156
II. Financial Restructurings 157
III. Corporate Restructurings 163
IV. Conclusion 173
D. Wealth Transfers and Conflicts of Interests with other Stakeholders 174
I. Risk Shifting and Wealth Transfers from Debtholders 175
II. Myopia and Wealth Transfers from Long-Term Shareholders 178
E. Empirical Evidence 180
F. Conclusion 182
Chapter II. Corporate Governance Systems and the Influence of Hedge Funds 184
A. The Traditional German Insider-based Corporate Governance System 184
I. The Old Governing Coalition in the German Corporate Governance System 185
II. Limited Influence of Capital Markets on German Corporate Governance 189
III. Conclusion 191
B. Activist Hedge Funds in the German Corporate Governance System 192
I. Reforms of the German Corporate Governance and the Emergence of Hedge Funds Activism 193
II. Ability of Hedge Funds to Restructure German Firms 197
III. Agency Problems between Hedge Funds and other Shareholders 201
IV. Empirical Evidence 202
C. Summary and Conclusion 204
Part III. Empirical Analysis – The Impact of Hedge Funds on German Target Firms 205
Chapter I. Data Description and Methodology 207
A. Sample Selection Approach 207
B. Decription of Dataset of Hedge Fund Engagements 209
I. Distribution of Events over Time, Industries and Market Segments 209
II. Hedge Funds’ Trading Approaches and Behavior vis-à-vis Target Firms 214
C. Methodology 217
I. Measuring Short-term Valuation Effects 218
II. Measuring Long-term Abnormal Performance 224
III. Operating Performance 230
Chapter II. Hedge Fund Activism in Good Times 232
A. Characteristics of Target Companies 232
I. Financial Policies, Profitability and Diversification 233
II. Market Valuation of Target Companies 237
III. Ownership Structure of Target Firms 245
B. Short-term Valuation Effects 247
I. Results for the Full Sample 248
II. Results for Subsamples 253
III. Cross-Sectional Regressions 265
A. Long-Run Performance 269
I. Buy-and-Hold Abnormal Returns 270
II. Calendar-time Portfolio Approach 289
III. Robustness Check Generalized Calendar Time Portfolio Approach 301
B. Summary and Conclusion 312
Chapter III. Hedge Fund Investments in the Down-Market 314
A. Hedge Fund Investments during the Recent Financial Crisis 316
B. Characteristics of Target Companies during the Down-Market 318
I. Financial Policies, Profitability and Diversification 319
II. Market Valuation of Target Companies 323
III. Ownership Structure of Target Firms 331
C. Valuation Effects in the Down-Market 334
I. Valuation Effects in the Down-Market – Full Period 334
II. Valuation Effects at different Stages of the Subprime Crisis 340
III. Subsamples based on event characteristics 341
IV. Cross-Sectional Regressions 349
V. Calendar Time Approach 353
VI. Robustness Check Generalized Calendar Time Approach 363
D. Conclusion 370
Chapter IV. Robustness Checks 371
A. Operating Performance 371
I. Good Times 372
II. Bad Times 378
B. Liquidity of Target Stocks 382
I. Good Times 382
II. Bad Times 384
III. Summary 387
Part IV. Conclusion and Outlook 388
Bibliography 393