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How can behavioural finance inform the investment process? We have taken a hypothetical 'typical' large fund management house and analysed their process. This collection of notes tries to explore some of the areas in which understanding psychology could radically alter the way they structure their businesses. The results may challenge some of your most deeply held beliefs.
Abstract: We suggest an empirical model to analyze the investment style of individual hedge funds and funds of funds. Our approach is based on a mixture of the style analysis approach suggested by Sharpe (1988), the factor push approach used in stress testing, and historical simulation. An interesting and straightforward extension of this model is the estimation of value-at-risk (VaR) figures. This extension is tested using a very intuitive implementation over a large sample of 2,934 hedge funds over the 1994-2000 period. Both the in-the-sample and the out-of-sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.
Alternative Investment Research Centre Working Paper No. 27 - By Harry M. Kat and Helder P. Palaro City University London - Sir John Cass Business School and City University London - Sir John Cass Business School
Jasmina Hasanhodzic and Andrew W. Lo Department of Electrical Engineering and Computer Science and Massachusetts Institute of Technology (MIT) - Sloan School of Management
In the last 2.5 years, Google has conducted the largest corporate experiment with prediction markets we are aware of. In this paper, Bo Cowgil, Justin Wolfers andEric Zitzewitz illustrate how markets can be used to study how an organization processes information. We document a number of biases in Google’s markets, most notably an optimistic bias. Newly hired employees are on the optimistic side of these markets, and optimistic biases are significantly more pronounced on days when Google stock is appreciating...
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Alpha has somehow achieved cult status in the hedge fund industry. That only a few understand the concept’s intricacies is both cause and symptom of this phenomenon. Alpha’s precise definition, its short supply, the impediments to finding it, and its real utility are not well understood. This article corrects this by presenting an intuitive explanation of what alpha really is. Written by Tammer Kamel.
In this paper Roger G. Ibbotson and Peng Chen focus on two issues. First, they analyze the potential biases in reported hedge fund returns, in particular survivorship bias and backfill bias, and attempt to create an unbiased return sample. Second, they decompose these returns into their three A,B,C components: the value added by hedge funds (alphas), the systematic market exposures (betas), and the hedge fund fees (costs).
By William Fung and David A. Hsieh.
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Hedge fund investors want reassurance that their hedge funds are following the strategies they say they are following. In this article from Risk Magazine in 2003 Maria Augusta Miceli and Gabriele Susinno show how the analysis of complex systems in physics, engineering and biology can be used to determine how assets are growing.
Among its findings, this white paper from Van Advisors concludes that hedge fund assets, now at $1 trillion, will at least double by 2009, quadruple to $4 trillion by 2013 and sextuple to $6 trillion by 2015.
The 1998 failure of Long-Term Capital Management (LTCM) is said to have nearly blown up the world's financial system. For such a near-catastrophic event, the finance profession has precious little information to draw from. By piecing together publicly available information, this paper by Philippe Jorion draws lessons from risk management practices at LTCM.
Harry M. Kat and Helder P. Palaro, City University London - Sir John Cass Business School and City University London - Sir John Cass Business School
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Harry M. Kat and Helder P. Palaro - City University London - Sir John Cass Business School and City University London - Sir John Cass Business School
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By Henry T.C. Hu and Bernard S. Black - University of Texas at Austin - School of Law and University of Texas at Austin - School of Law
Marcel Kahan and Edward B. Rock - New York University - School of Law and University of Pennsylvania - School of Law
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Marcel Kahan and Edward B. Rock - New York University - School of Law and University of Pennsylvania - School of Law
Henry T.C. Hu and Bernard S. Black - University of Texas at Austin - School of Law and University of Texas at Austin - School of Law
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Victor Fleischer- University of Colorado Law School
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Gjergji Cici,Scott Gibson and Rabih Moussawi - College of William & Mary-Mason School of Business, College of William and Mary - Mason School of Business and University of Pennsylvania.
