Hedge Fund Research Summary- David A. Hsieh

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Publications on Hedge Funds

Peer-Reviewed Journal Articles:

[1] "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," with William Fung, Review of Financial Studies, 10 (1997), 275-302. Summary, Abstract, PDF file.

[Summary: This is the first article on hedge funds published in a refereed academic journal. In this article, we show that hedge fund returns are very different from mutual fund returns. In addition, hedge fund returns are very heterogeneous--the first five principal components can explain rougly 45% of the cross-sectional variation.]

[2] "Survivorship Bias and Investment Style in the Returns of CTAs," with William Fung, Journal of Portfolio Management, 24 (1997), 30-41. Summary. PDF file (last version before publication).

[Summary: In this article, we find that the attrition rate of funds operated by commodity trading advisors (CTAs) are higher than those of mutual funds. However, both suriving and dissolved funds show similar option-like return patterns with respect to global equity markets.]

[3] "Is Mean-Variance Analysis Applicable to Hedge Funds?" with William Fung, Economic Letters, 62 (1999), 53-58. PDF file (last version before publication).

[Summary: While hedge fund returns have non-normal distributions, so the standard mean-variance framework are not applicable. However, we show that mean-variance analysis approximately preserves the  rankings of hedge funds based on standard utility functions.]

[4] "A Primer on Hedge Funds," with William Fung, Journal of Empirical Finance, 6 (1999), 309-331. PDF file (last version before publication).

[Summary: The article proposes a business model for hedge funds to explain their desire for secrecy and the risk-sharing features between managers and investors. We also discuss how to employ statistical methods to model the risk factors in different hedge fund strategies.]

[5] "Performance Characteristics of Hedge Funds and CTA Funds: Natural Versus Spurious Biases," with William Fung, Journal of Financial and Quantitative Analysis, 35 (2000), 291-307. PDF file (last version before publication).

[Summary: This article examines different biases in hedge fund databases, and proposes to use funds-of-funds as a more accurate measure of  aggregate hedge fund performance.]

[6]  "Measuring the Market Impact of Hedge Funds," with William Fung, Journal of Empirical Finance, 7 (2000), 1-36. PDF file (last version before publication).

[Summary: This article estimates hedge fund exposures during a number of market events, from the October 1987 stock market crash until the Asian Currency Crisis of 1997. We find little evidence that hedge funds systematically caused market prices to deviate from economic fundamentals.]

[7] "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," with William Fung, Review of Financial Studies, 14 (2001), 313-341. PDF file. Winner of the Fischer Black Memorial Foundation1999 Robert J. Schwartz Memorial Prize for the best paper on hedge funds. [Earlier versions of this paper were titled: "A Risk Neutral Approach to Valuing Trend Following Strategies", "Nonlinear Dynamics of Trend Following Strategies".]

[Summary: This article models the trend-following strategy of many commodity funds and managed futures funds using lookback straddles. We show that portfolios of lookback straddles can explain trend-following funds' returns better than standard asset indices.]

[8] "Benchmarks of Hedge Fund Performance: Information Content and Measurement Biases," with William Fung, Financial Analyst Journal, 58 (2002), 22-34. PDF file (last version before publication).

[Summary: This article updates the estimates of biases in hedge fund databases, and shows how to use funds-of-funds to measure more accurately the returns of hedge funds.]

[9]  "Asset-based Style Factors for Hedge Funds," with William Fung, Financial Analyst Journal, 58 (2002), 16-27. PDF file (last version before publication).

[Summary: This is the first article to propose to use market prices of traded securities to create "asset-based" benchmarks for hedge funds. We show that Small Cap Stocks, High Yield Bonds, and Emerging Market Stocks can explain a significant amount of return variation in many hedge fund strategies.]

[10] "The Risk in Fixed-Income Hedge Fund Styles," with William Fung, Journal of Fixed Income, 12 (2002), 6-27. PDF file (last version before publication).

[Summary: This article shows that fixed income hedge funds typically have exposure to interest rate spreads, such as credit spreads, mortgage spreads, etc. By linking fixed income hedge fund strategies to interest rate spreads, we can model the performance of these strategies when spreads are more volatile, as in the 1970s. This cannot be done using the short history of hedge funds in the 1990s, when spread volatility is much lower.]

[11] "Hedge Fund Benchmarks: A Risk Based Approach," with William Fung, Financial Analyst Journal, 60 (2004), 65-80. PDF file (last version before publication). [This paper received a CFA Institute Graham and Dodd Award of Excellence for 2004.]

[Summary: The article proposes a seven-factor model for hedge funds. We use two equity factors (from research on equity hedge funds), two bond factors (from research on fixed income hedge funds), and three trend-following factors (from research on commodity funds and managed futures funds). These seven factors can explain up to 80% of the return variation of funds-of-funds and various hedge fund indices.]

[12] "Extracting Portable Alphas from Equity Long-Short Hedge Funds," with William Fung, Journal of Investment Management, 2 (2004), 57- 75. PDF file (last version before publication). Reprinted in H. Gifford Fong (ed.), The World of Hedge Funds: Characteristics and Analysis, New Jersey: World Scientific, 2005, 161-180.

[Summary: This article shows that long-short equity hedge funds have significant alpha relative to conventional factors (e.g. S&P 500) as well as alternative factors (e.g. small cap-large cap stocks). These alternative alphas can be extracting by hedging out the main risk factors.]

Conference Volumes, Book Chapters, Invited Papers:

[13] "Do Hedge Funds Disrupt Emerging Markets?," with William Fung and Konstantinos Tsatsaronis, Brookings-Wharton Papers on Financial Services, 2000, 377-421. PDF file (last version before publcation).

[Summary: This paper provides detailed quantitative estimates of hedge fund exposures during the Asian Currency Crisis of 1997. We show that hedge fund positions are only a small part of much larger speculative bets taken by investors in this episode. By themselves, hedge fund positions could not have overwhelmed the ability of Asian central banks to maintain their exchange rate regime.]

Working Papers:

"Performance Attribution and Style Analysis: From Mutual Funds to Hedge Funds," with William Fung, 1996. PDF file.
 
"Hedge Funds: Performance, Risk and Capital Formation," with William Fung, Narayan Naik, and Tarun Ramadorai. PDF file.

Interviews: