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Global Asset Allocation: Fund Age and Hedge Fund Returns

Finance 453: Global Asset Allocation and Stock Selection. Global Asset Allocation: Fund Age and Hedge Fund Returns. Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA Cam.harvey@duke.edu +1 919.660.7768 office || +1 919.271.8156 mobile

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Global Asset Allocation: Fund Age and Hedge Fund Returns

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  1. Finance 453: Global Asset Allocation and Stock Selection Global Asset Allocation:Fund Age and Hedge Fund Returns Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA Cam.harvey@duke.edu +1 919.660.7768 office || +1 919.271.8156 mobile http://www.duke.edu/~charvey

  2. Fund Age and Hedge Fund Returns Do younger funds outperform older funds? Popular Press • The Financial Times recently wrote about a PerTrac study* claims that funds less than 2 years old greatly outperform funds that are more than 2 years old • However, there are reasons to be sceptical of such evidence. • PerTrac study does not control for other important (and obvious) factors. As such, the results could be spurious. • What is the evidence is a scientific analysis of age and return? *May 19, 2008, http://www.pertrac.com/per0020/web/me.get?web.websections.show&PER0020_1278

  3. Fund Age and Hedge Fund Returns Do younger funds outperform older funds? Conducting a scientific study • Survivorship. PerTrac study admits that younger fund sample suffers from greater survivorship problem. This would bias the results in favour of finding a higher return in young funds. • Host of other factors* such as: • Previous year’s incentives • Discretion (lock up, notice, redemption periods) • Past performance • Past volatility (controlling for risk) • Management fees • Fund strategy (want apples to apples comparison) • PerTrac study does not control for any of these factors *This list of control variables is meant to be illustrative rather than comprehensive.

  4. Fund Age and Hedge Fund Returns Do younger funds outperform older funds? New financial research • “Role of managerial incentives and discretion in hedge fund performance,” 2007 working paper, by Vikas Agarwal (Georgia State University), Naveen D. Daniel (Drexel University) and Narayan Naik (London Business School).* • Study is in advanced stages of peer review at the Journal of Finance (the top scientific journal in the field of finance) • None of the authors are affiliated with GLG Partners • In contrast to the PerTrac study, this research • Uses a much more comprehensive sample of funds: the union of HFR, TASS, MSCI and CISDM databases • Conducts analysis of returns and age controlling for other factors *http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889008

  5. Fund Age and Hedge Fund Returns Do younger funds outperform older funds? New financial research: Findings • PerTrac study claims a 551bp per annum difference between the youngest and oldest fund returns • Journal of Finance paper shows a statistically insignificant and economically small difference of 20-40bp • Conclusion of the research paper is that there is no scientific evidence linking fund age to diminished performance • In addition, even with the Journal of Finance study, survivorship could be an issue which could account for the 20-40bp difference.

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