Study-Unit Description

Study-Unit Description


CODE BKF5270

 
TITLE Hedge Funds

 
UM LEVEL 05 - Postgraduate Modular Diploma or Degree Course

 
MQF LEVEL 7

 
ECTS CREDITS 5

 
DEPARTMENT Banking and Finance

 
DESCRIPTION The study-unit covers seven large topics related to the analysis of hedge funds. These topics include both theoretical models as well as empirical evidence. The required quantitative techniques are also discussed during the class.

Topic 1: HF databases and data biases
The topic covers the general description of the HF industry, HF investment strategies, and databases.

Topic 2: Do HFs manipulate reported returns?
Various ways in which HFs can manipulate the reported returns and other performance measures are discussed here. The students will all learn special techniques to detect such misbehavior.

Topic 3: HF Alpha – Does it exist and where does it come from?
The student will learn how to assess HF performance and managerial skill in a regression framework, and how to analyze persistence of managerial skill (if any) using parametric and non-parametric approaches.

Topic 4: Managerial incentives and risk taking
The lecture covers the existing theoretical models and empirical evidence on hedge fund risk taking, and discusses the links between the incentives provided by managerial compensation contracts and the optimal risk taking.

Topic 5: Hedge fund Flow
Here, the relations between HF past performance and capital flows, as well as flows and future performance are investigated using a piecewise linear regression framework.

Topic 6: Hedge fund liquidation
The lecture, first, introduces a logit model and a proportional hazard rate model to estimate liquidation probability of hedge funds. It then proceeds with discussion of the existing empirical evidence on the drivers of liquidation probabilities.

Topic 7: Hedge fund performance and systemic risk
This section, first, discusses the ways to model systemic risk events and their implication for correlations between various asset classes. It then links the general financial market and hedge funds, and illustrates how systemically important hedge funds can be identified.

Study-Unit Aims:

The aims of the study-unit are to introduce students to a relatively new but increasingly important industry of hedge funds, its investment strategies, performance characteristics, associated risks, and to analyze the links between the industry and the financial market.

The second aim of the unit is to boosts the methodological skills of the students. The study-unit will introduce technical tools and methodological approaches, which are not only essential to the analysis of the hedge fund industry, but can also be applied to other types of empirical research in economics and finance.

Learning Outcomes:

1. Knowledge & Understanding:

By the end of the study-unit the student will be able to:
- understand the key difference between hedge funds and other financial institutions;
- understand the main challenges for analyzing hedge funds;
- understand the key drives of hedge fund performance;
- understand the main incentives provided by hedge fund compensation constructs and their implications for the risk taking;
- understand the methods of assessing hedge fund liquidation probabilities and know the main factors driving these probabilities;
- understand the links between general financial markets and the hedge fund industry and identify systemically important hedge funds.

2. Skills:

By the end of the study-unit the student will be able to:
- detect various biases in the (hedge fund) reported returns and clean the data from these biases;
- estimate linear/piecewise linear/nonparametric regression models to evaluate hedge fund performance and risk;
- test for persistence in performance/risk using parametric and nonparametric approaches;
- apply logit and probit models to model liquidation probabilities, interpret the estimation results;
- write (academic) reports summarizing and interpreting various empirical findings.

Main Text/s and any supplementary readings:

Main Texts:

The study-unit is based on a collection of research papers, which will be supplied together with the lecture slides. The provisional list includes:

- Mila Getmansky, Andrew W. Lo, and Igor Makarov (2004), An econometric model of serial correlation and illiquidity in hedge fund returns, Journal of Financial Economics 74, 529–609.
- Agarwal, V., N. D. Daniel and N. Y. Naik (2011). "Do Hedge Funds Manage Their Reported Returns?" Review of Financial Studies 24(10): 3281-3320.
- Bollen, N. P. B. and V. K. Pool (2009). "Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution." The Journal of Finance 64(5): 2257-2288.
- Ben-David, I., F. Franzoni, A. Landier and R. Moussawi (2013). "Do Hedge Funds Manipulate Stock Prices?" The Journal of Finance 68(6): 2383-2434.
- William Fung and David A. Hsieh (2004), Hedge Fund Benchmarks: A Risk-Based Approach, Financial Analysts Journal, 60 (5), 65-80.
- Vikas Agarwal and Narayan Y. Naik (2000), Multi-Period Performance Persistence Analysis of Hedge Funds, Journal of Financial and Quantitative Analysis, 35(3), 327-342.
- Additional reading: Robert Kosowski, Narayan Y. Naik, Melvyn Teo (2007), Do hedge funds deliver alpha? A Bayesian and bootstrap analysis, Journal of Financial Economics 84, 229–264.
- James E. Hodder and Jens Carsten Jackwerth (2007), Incentive Contracts and Hedge Fund Management, Journal of Financial and Quantitative Analysis, 42 (4), 811–826.
- Lan, Y., N. Wang, and J. Yang (2013). The economics of hedge funds. Journal of Financial Economics 110 (2), 300 - 323.
- George O. Aragon and Vikram Nanda (2012), Tournament Behavior in Hedge Funds: High-water Marks, Fund Liquidation, and Managerial Stake, Review of Financial Studies, 25 (3), 937-974.
- Olga Kolokolova and Achim Mattes (2014), Recovering Managerial Risk Taking from Daily Hedge Fund Returns: Incentives at Work? Working paper.
- Bill Ding, Mila Getmansky, Bing Liang, and Russ Wermers, 2009, Share Restrictions and Investor Flows in the Hedge Fund Industry. Working paper.
- Bing Liang and Hyuna Park, 2010, Predicting Hedge Fund Failure: A Comparison of Risk Measures, Journal of Financial and Quantitative Analysis, 45(1), 199–222.
- Olga Kolokolova, 2011, Strategic behavior within families of hedge funds, Journal of Banking & Finance 35, 1645–1662.
- Hodder, James E., Jens C. Jackwerth, and Olga Kolokolova, 2013, Recovering Delisting Returns of Hedge Funds. Forthcoming in Journal of Financial and Quantitative Analysis.

 
ADDITIONAL NOTES Pre-requisite Qualifications: Basics of finance (e.g., CAPM, mean-variance efficient frontier, Sharpe ratio) and econometrics (linear regression analysis). Students will benefit from knowledge of some econometric software (Matlab or R would be ideal, alternatively STATA, or Excel proficiency would be required).

 
STUDY-UNIT TYPE Lecture

 
METHOD OF ASSESSMENT
Assessment Component/s Sept. Asst Session Weighting
Report Yes 100%

 
LECTURER/S Olga Kolokolova

 

 
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It should be noted that all the information in the description above applies to study-units available during the academic year 2023/4. It may be subject to change in subsequent years.

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