Knowledge that Transforms

Steven Dennis, Debarshi Nandy, Ian G. Sharpe, The Determinants of Contract Terms in Bank Revolving Credit Agreements, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 1 (Mar., 2000), pp. 87-110

This paper examines the association between block ownership and market liquidity. Blockholders are believed to have access to private, value-relevant information via their roles as monitors of firms' operations. consistent with this, we find that firms with greater blockholder ownership, either by managers or external entities, have larger quoted spreads, effective spreads, adverse selection spread components, and smaller quoted depths.

Kalok Chan, Allaudeen Hameed, Wilson Tong, Profitability of Momentum Strategies in the International Equity Markets, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 2 (Jun., 2000), pp. 153-172

Katrina Ellis, Roni Michaely, Maureen O'Hara, The Accuracy of Trade Classification Rules: Evidence from Nasdaq, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 4 (Dec., 2000), pp. 529-551

Since hedge funds specify significant lock-up periods, we investigate persistence in the performance of hedge funds using a multi-period framework in which the likelihood of observing persistence by chance is lower than in the traditional two-period framework. Under the null hypothesis of no manager skill (no persistence), the theoretical distribution of observing wins or losses follows a binormial distribution. We test this hypothesis using the traditional two-period framework and compare the findings with the results obtained using our multi-period framework. We examine whether persistence is sensitive to the length of return measurement intervals by using quarterly, half-yearly and yearly returns. We find maximum persistence at the quarterly horizon indicating that presistence among hedge fund managers is short term in nature.

In this paper, I examine survivorship bias in hedge fund returns by comparing two large databases. I find that the survivorship bias exceeds 2% per year. Results of survivorship bias by investment styles indicate that the biases are different across styles. I reconcile the conflicting results about survivorship bias in previous studies by showing that the two major hedge fund databases contain different amounts of dissolved funds. Empirical results show that poor performance is the main reason for a fund's disappearance. Furthermore, I find that there are significant differences in fund returns, inception date, net assets value, incentive fee, management fee, and investment styles for the 465 common funds covered by both databases. Mismatching between reported returns and the percentage changes in NAVs can partially explain the differences in returns.

Hsiu-Lang Chen, Narasimhan Jegadeesh, Russ Wermers, The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 343-368

William Fung, David A. Hsieh, Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 291-307

We develop a positive behavioral portfolio theory (BPT) and explore its implications for portfolio construction and security design. The optimal portfolios of BPT investors resemble combinations of bonds and lottery tickets, consistent with Friedman and Savage's (1948) observation. We compare the BPT efficient frontier with the mean-variance efficient frontier and show that, in general, the two frontiers do not coincide. Optimal BPT portfolios are also different from optimal CAPM portfolios. In particular, the CAPM twofund separation does not hold in BPT. We present BPT in a single mental account version (BPT-SA) and a multiple mental account version (BPT-MA). BPT-SA investors integrate their portfolios into a single mental account, while BPT-MA investors segregate their port? folios into several mental accounts. BPT-MA portfolios resemble layered pyramids, where layers are associated with aspirations. We explore a two-layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches.