What drives hedge fund flows? (Agarwal, Vikas 2018) Flashcards
What kind of strategies hedge funds engage in and how hedge funds investors are viewed?
Hedge funds engage in more exotic investment strategies, and their investors are viewed as more sophisticated than mutual fund or ETF. And they also pay substantial fees to manager of funds.
What were two implications from “flow-performance horse race”?
- Investors use CAPM the most for capital allocation.
- Large amount of flows caused by unexplained factors.
Which model had the highest probability that the sign of fund flow depends on the alpha?
Highest from CAPM, the simplest method.
For which of the 3 return components, investor flows respond the most?
Emphasis on exotic factors more than on traditional risk factors and alpha.
How do investors credit managers not only on alpha?
They also credit for the ability to generate returns from exotic factors, they know why they want to invest in hedge funds, and can differentiate them.
What is the implication of exotic beta for a hedge fund?
Exotic beta is the hedge fund alpha.
How did authors evaluate the persistance over time for hedge fund alpha, returns attributable to traditional risks, and returns attributable to exotic risks?
They regressed risk component in the next period on risk component in the current period
What authors find on the persistence for hedge funds?
They find no persistence, but that could also be because returns to those factors are not persistent.
Authors found evidence that of risk exposure (beta) persistence, what does that mean?
It means that hedge funds follow certain strategies for risk exposures, but future returns to those exposures are not predictable from the recent returns to those exposures.
With what investors that pay high performance fees are associated?
They are relatively more sensitive to returns associated with exotic risk exposures.
What do higher-fee funds deliver? And do traditional and exotic risk components differ much?
Higher-fee funds deliver significantly higher alphas, but traditional and exotic risk components do not differ much across funds with different fees (so it is skill that they earn with, not exposures to exotic risks)
What does emphasis on CAPM reflect?
REflects specific tendency of investors to chase recent returns associated with both traditional and exotic risk exposures.
-> As the returns to factors do not persist, this is not an optimal practice
What investors should do with traditional and exotic risks?
Instead of looking on how much exotic risks contribute to recent returns, investors should employ more sophisticated models and separate traditional and exotic funds.
