Many institutions are attracted to diversified portfolios of hedge funds, referred to as Funds of Hedge Funds (FoHFs). In this article, we examine a new database that separates out for the first time the effects of diversification (the number of underlying hedge funds) from scale (the magnitude of assets under management). We find with others that the variance-reducing effects of diversification diminish once FoHFs hold more than 20 underlying hedge funds. This excess diversification actually increases their left-tail risk exposure once we account for return smoothing. Furthermore, the average FoHF in our sample is more exposed to left-tail risk than are naïve 1/N randomly chosen portfolios. This increase in tail risk is accompanied by lower returns, which we attribute to the cost of necessary due diligence that increases with the number of hedge funds.

We analyze mutual fund industry selectivity—the performance of a fund’s industry allocation relative to the market. We find that industry selection accounts for a full third of fund performance based on two-digit standard industrial classification (SIC) codes, with the remaining attributable to the performance of individual stocks relative to their own industries. More importantly, we find that industry-selection skill drives persistence in relative performance. Unlike stock-selection ability, industry selectivity is not eroded by increasing fund assets. Our results suggest that accounting for a manager’s ability to pick outperforming industries provides information beyond standard performance measures that can enhance a fund investor’s future performance.

Journal Article Announcements Get access The Review of Asset Pricing Studies, Volume 2, Issue 2, December 2012, Page 111, https://doi.org/10.1093/rapstu/ras009 Published: 10 November 2012

Affine term structure models imply an affine relation between yields and factors, and between yields and yields. Hence, a necessary condition for the affine class to hold is that yield changes are linearly related to changes in as many other yields as the number of underlying risk factors. At the same time, yield changes should be unrelated to changes in nonlinear transformations of other yields. We test this hypothesis using weekly data on U.S. Treasury yields for the June 1961–December 2002 sample period. Bootstrap-adjusted tests lead to only weak rejections of the affine class, and a simulation shows that these tests have correct size and high power. Imposing the cross-equation restrictions deriving from a no-arbitrage affine term structure model leads to stronger rejections, but these stronger rejections have more to do with the no-arbitrage restrictions than with the implication of linearity. In an out-of-sample hedging exercise, the constant hedge ratios implied by the affine class generally outperform time-varying hedge ratios implied by nonlinear models.

This study examines battles between short sellers and firms. Firms use a variety of methods to impede short selling, including legal threats, investigations, lawsuits, and various technical actions intended to create a short squeeze. These actions create short sale constraints. Consistent with the hypothesis that short sale constraints allow stocks to be overpriced, firms taking anti-shorting actions have in the subsequent year very low abnormal returns of about −2% per month.

Berk and Green (2004) make a theoretical argument that performance persistence should not exist since new money flows into well-performing mutual funds and there are diseconomies of scale, or because successful funds capture excess returns by raising fees. We find that performance prediction continues when we examine samples of larger and larger funds and that past performance predicts future performance for holding periods up to three years. Funds that outperform index funds of the same risk can be identified. We find that expense ratios are lower for large funds, and decrease as funds get larger or perform well.

We analyze corporate fraud in a setting in which managers have superior information but are biased against liquidation because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally design corporate governance by jointly choosing audit quality and managerial compensation. We analyze how country-level rules affect these firm-level choices. Our analysis underscores that different country-level governance provisions have different effects on firm-level governance: Some act as substitutes of internal governance mechanisms, whereas others enhance their effectiveness and therefore complement them.

We model a retail financial institution that outsources its advice services to an intermediary, making the two parties jointly responsible for consumers' experience with the products. In this context, courts that enforce state-contingent legal rules are necessary in order to avoid market breakdowns. To maximize social welfare, the government implements a system of penalties that depends on product characteristics and on the firm's relative ability to control quality. This legal system emphasizes reliable advice over transaction pace. Furthermore, the implicit team structure of the firm and its intermediary prevents self-regulation from achieving the same social efficiency.

We study the role of shareholder information during the acquisition of widely held firms. When target shareholders share the same information about the post-takeover value, increasing the precision of information has no effect on the expected acquisition price. However, more precise information aggravates the free-rider problem, allowing shareholders to better discern when it is worthwhile to hold out rather than tender their shares. By contrast, when information is dispersed among shareholders, providing shareholders with superior information induces the raider to offer higher prices, thus increasing shareholder value. However, in this case, neither prices nor tendering decisions aggregate any information.