Fung, Hsiej, Naik & Ramadorai: Hedge funds: performance, risk, and capital formation

Question 1

hedge funds are

Answer 1

lightly regulated active investment vehicles with great trading flexibility

Question 2

Hedge funds are believed to

Answer 2

pursue highly sophisticated investment strategies, and promise to deliver returns to their investors that are unaffected by vagaries of financial markets

Question 3

large portion of the variation in hedge fund returns can be explained by market-related factors

Answer 3

–> hedge fund fees provide compensation for taking on systematic risk rather than for exploiting opportunities

Question 4

large funds perform

Answer 4

worse than small funds

Question 5

(upward) bias in hedge fund data:

Answer 5

lack of uniform reporting standards; hedge funds can elect whether to report their performance and to which data base they report

Question 6

fund-of-fund returns are a more accurate representation of the returns earned by hedge fund investors

Answer 6

–> reflect the cost of real-life constraints involved in hedge fund investing and the costs of managing a portfolio of underlying hedge funds

Question 7

have-alpha funds exhibit far lower liquidation rates than

Answer 7

beta-only funds –> only 7% of have alpha funds liquidated compared to 22% of beta-only funds

Question 8

have alpha funds that experience relatively high capital inflows are less likely to be ..

Answer 8

subsequently reclassified as have-alpha funds; funds that receive lower capital inflows have a better chance of delivering alpha in the future

Question 9

have-alpha funds that experience high (low) capital inflows have ..

Answer 9

significantly lower (higher) t-statistic of alpha in the future

Question 10

capital inflows adversely impact alpha at the aggregate level

Answer 10

there has been a substantial increase in capital flows to the hedge fund industry; the magnitude of alpha delivered by the average have-alpha fund has experienced a statistically significant decline

Question 11

the number of funds is steadily increasing over time –> reflects both the

Answer 11

availability of data and the growth of the hedge fund industry

Question 12

there is a greater chance for a fund to deliver alpha in the subsequent period if

Answer 12

it is a member of the have-alpha group

Question 13

have-alpha funds have a greater ability to avoid liquidation regardless of

Answer 13

the length of the post-classification period

Question 14

on average, 22% of the funds deliver

Answer 14

positive and significant alpha

Question 15

have-alpha funds are less likely to be liquidated, and have a

Answer 15

higher propensity to persistently deliver alpha than beta-only funds

Question 16

capital flows into have-alpha funds do

Answer 16

not exhibit trend-chasing behavior

Question 17

capital flows into beta-only funds do

Answer 17

exhibit return-chasing behavior

Question 18

have-alpha funds that experience high capital have

Answer 18

lower probabilities of being classified as have-alpha funds, and have lower future information ratios

Question 19

there are significant differences n the ability of funds to generate alpha:

Answer 19

funds face diminishing returns to scale in deploying their ability, and investors rationally direct capital toward alpha-generating funds