In this passage, Kosowski, Naik and Teo (2007) innovatively introduce Bayesian and bootstrap analysis into the study of hedge fund performances. With the assistance of those two statistical sophisticates, the authors’ deductions diminish luck and advocate persistence on an annual horizon. (Kosowski et al., 2007: 229) Their comprehensive arguments have truly challenged the traditional views on hedge funds’ performance in particular and on market efficiency in general. As the technical skills applied are as exciting as the implications arisen, this passage is worth reading in detail for either statistical inspirations or hedge fund insights.
The rest of this critical review provides a brief summary of the passage and arguments for its topic’s significance first. For the review, the main focus is on the passage’s contribution measured by relationship to literature, and efficiency in data adjustment and application of methodologies. Some limitations of their conclusions are pointed out by the end, which can also be notes for readers.
In a nutshell, this passage studies top hedge funds’ performances between 1990s and 2000s on their ability to generate risk-adjusted excessive returns before and after fees. For such ability, alpha t-statistics are calculated as indicators meanwhile returns, denoted alphas, are estimated using the seven-factor model initiated by Fung and Hsieh (2004) benchmarking systematic risks. The null hypothesis emphasizing sample variations can be rejected considering the low probability found in bootstrap approach yielding as extreme ramifications with luck only. (Kosowski et al., 2007: 238) Data biases are then controlled separately later for the robustness of that conclusion. That finding, together with Bayesian ...
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...es & Hedge Funds, vol. 15, no.1, pp. 51-69.
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Long-Term Capital Management was a hedge fund company founded by John Meriwether in 1994, in cooperation with Nobel Prize in economics winners Myron Scholes and Robert Merton who resided on its board.[1] Hedge funds are essentially large, unregulated, private investment pools for wealthy individuals and institutions. They are not limited by the portfolio composition and leverage (how much they borrow compared with their capital) restrictions put on other types of investment vehicles.[2] This company had developed a sophisticated computer model to take advantage of arbitrage deals usually with U.S., Japanese, and European sovereign bonds.
Melicher, Ronald W. and Edgar A. Norton (2014). Introduction to Finance (15th ed.). Hoboken, N.J.: John Wiley & Sons, Inc.
A generation ago, it was generally believed that security markets were efficient in adjusting information about individual stocks and stock market as a whole (Malkiel, (2003)). However, we cannot deny the efficient market hypothesis has several paradoxes.
The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.
Perry, J., Holmes, N., Barwick, G., & Small, R. (2008). Recent developments: short selling and market abuse. London: ashurst.
Morgenson, G. (2005, September 17). Clues to a Hedge Fund's Collapse. In The New York Times. Retrieved November 1, 2013
When a Fortune magazine article highlighted a mysterious investment that exceeded every mutual fund on the market by double digits over the past year and even higher double digits throughout the past five years, the hedge fund business was created. There were just about 140 hedge funds in effect by 1968. In a surprising turn, many funds were withdrawn from Jones’ strategy and chose to charter in riskier gimmick backed on long-term leverage instead of focusing on stock picking coupled with hedging. These strategies led to cumbersome losses in 1969-1970 and between 1973-197...
According to Perold (2004), ‘CAPM can be served as a benchmark for understanding the capital market phenomena that cause asset prices and investor behavior to deviate from the prescript...
The country’s highly tuned legal regulatory framework has allowed it become Europe’s leading investment fund center. Due to this those that would like to market their investment funds on a global scale have turned to Luxembourg as the country focuses on the administration and cross-border distribution of investment funds. The types of investments that can be made include banking services (that focus in international loans and capital markets activity, financial engineering, structured products, private banking and financial services for large and medium-sized businesses), renminibi businesses, investment vehicles, Insurance & Pensions, and microfinance
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision.
These tests represent a comprehensive analysis of the financial performance of these funds over a recent 3-year period and enable us to investigate whether these funds offer investors returns which are significantly less than those available from investing in a broadly-based market portfolio that is not restricted to the selection of ethical securities. The tests also allow us to compare the performance of ethical with similar non-ethical funds and to study whether the fund managers attempt to time the market. Finally, some preliminary analysis on what determines ethical fund performance is conducted. The pairs analysis as follows:
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
Amaranth made huge bets on the market moving in one direction, the direction of their leveraged bets. Although the fund’s investors would have significant returns if the trades went as planned, this strategy cannot effectively minimize risk. Also, futures contracts that Amaranth engaged in have higher risk than equities because of the leverage given to futures traders. Amaranth was therefore exposed to high level of risks, which will be discussed in the later section. The Amaranth debacle was mainly due to the insufficient risk management steps taken and the incorrect bets on the
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.