1932

Abstract

The hedge-fund industry has grown rapidly over the past two decades, offering investors unique investment opportunities that often reflect more complex risk exposures than those of traditional investments. In this article, we present a selective review of the recent academic literature on hedge funds as well as updated empirical results for this industry. Our review is written from several distinct perspectives: the investor's, the portfolio manager's, the regulator's, and the academic's. Each of these perspectives offers a different set of insights into the financial system, and the combination provides surprisingly rich implications for the Efficient Markets Hypothesis, investment management, systemic risk, financial regulation, and other aspects of financial theory and practice.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110311-101741
2015-12-07
2024-04-24
Loading full text...

Full text loading...

/deliver/fulltext/financial/7/1/annurev-financial-110311-101741.html?itemId=/content/journals/10.1146/annurev-financial-110311-101741&mimeType=html&fmt=ahah

Literature Cited

  1. Ackermann C, McEnally R, Ravenscraft D. 1999. The performance of hedge funds: risk, return, and incentives. J. Finance 54:833–74 [Google Scholar]
  2. Adrian T. 2007. Measuring risk in the hedge fund sector. Curr. Issues Econ. Finance 13:31–7 [Google Scholar]
  3. Adrian T, Shin H. 2008. Liquidity, monetary policy, and financial cycles. Curr. Issues Econ. Finance 14:11–7 [Google Scholar]
  4. Adrian T, Shin HS. 2010. Liquidity and leverage. J. Financ. Int. 19:418–37 [Google Scholar]
  5. Agarwal V, Aragon G, Shi Z. 2015. Funding liquidity risk of funds of hedge funds: evidence from their holdings Work. Pap., Ariz. State Univ.
  6. Agarwal V, Daniel ND, Naik NY. 2002. Determinants of money-flow and risk-taking behavior in the hedge fund industry. Work. Pap., Georgia State Univ.
  7. Agarwal V, Daniel ND, Naik NY. 2009. Role of managerial incentives and discretion in hedge fund performance. J. Finance 64:2221–56 [Google Scholar]
  8. Agarwal V, Daniel ND, Naik NY. 2011. Do hedge funds manage their reported returns?. Rev. Financ. Stud. 24:103281–320 [Google Scholar]
  9. Agarwal V, Fos V, Jiang W. 2014. What happens “before the birth” and “after the death” of a hedge fund?. Bank. Mark. Invest. 129:17–25 [Google Scholar]
  10. Agarwal V, Jiang W, Tang Y, Yang B. 2013. Uncovering hedge fund skill from the portfolio holdings they hide. J. Finance 68:2739–83 [Google Scholar]
  11. Agarwal V, Kale JR. 2007. On the relative performance of multi-strategy and funds of hedge funds. J. Invest. Manag. 5:341–63 [Google Scholar]
  12. Agarwal V, Naik NY. 2000a. Generalized style analysis of hedge funds. J. Asset Manag. 1:93–109 [Google Scholar]
  13. Agarwal V, Naik NY. 2000b. Multi-period performance persistence analysis of hedge funds. J. Financ. Quant. Anal. 35:327–42 [Google Scholar]
  14. Agarwal V, Naik NY. 2000c. On taking the alternative route: risks, rewards, and performance persistence of hedge funds. J. Altern. Invest. 2:6–23 [Google Scholar]
  15. Agarwal V, Naik NY. 2004. Risks and portfolio decisions involving hedge funds. Rev. Financ. Stud. 17:63–98 [Google Scholar]
  16. Aggarwal RK, Jorion P. 2009. The risks of emerging hedge fund managers. J. Invest. 18:100–7 [Google Scholar]
  17. Aggarwal RK, Jorion P. 2010a. Hidden survivorship in hedge fund returns. Financ. Anal. J. 66:69–74 [Google Scholar]
  18. Aggarwal RK, Jorion P. 2010b. The performance of emerging hedge fund managers. J. Financ. Econ. 96:238–56 [Google Scholar]
  19. Aiken AL, Clifford CP, Ellis J. 2013. Out of the dark: hedge fund reporting biases and commercial databases. Rev. Financ. Stud. 26:1208–43 [Google Scholar]
  20. Aiken AL, Clifford CP, Ellis J. 2015. Hedge funds and discretionary liquidity restrictions. J. Financ. Econ. 116:197–218 [Google Scholar]
  21. Allen F, Carletti E. 2008. The role of liquidity in financial crises. Prepared for Jackson Hole Econ. Policy Symp.
  22. Alvarez W. 1997. T. Rex and the Crater of Doom. Princeton, NJ: Princeton Univ. Press
  23. Amenc N, Martellini L, Meyfredi J, Ziemann V. 2010. Passive hedge fund replication—beyond the linear case. Eur. Financ. Manag. 16:191–210 [Google Scholar]
  24. Amihud Y, Mendelson H. 1986. Asset pricing and the bid-ask spread. J. Financ. Econ. 17:223–49 [Google Scholar]
  25. Amin G, Kat H. 2003. Hedge fund performance 1990–2000: Do the “money machines” really add value?. J. Financ. Quant. Anal. 38:2251–74 [Google Scholar]
  26. Amo A, Harasty H, Hillion P. 2007. Diversification benefits of funds of hedge funds identifying the optimal number of hedge funds. J. Altern. Invest. 10:10–21 [Google Scholar]
  27. Ang A, Bekaert G. 2002. International asset allocation with regime shifts. Rev. Financ. Stud. 15:41137–87 [Google Scholar]
  28. Ang A, Bollen NPB. 2010. Locked up by a lockup: valuing liquidity as a real option. Financ. Manag. 39:31069–95 [Google Scholar]
  29. Ang A, Gorovyy S, van Inwegen GB. 2011. Hedge fund leverage. J. Financ. Econ. 102:102–26 [Google Scholar]
  30. Anson MJP. 2001. Hedge fund incentive fees and the ‘free option.’. J. Altern. Invest. 4:43–48 [Google Scholar]
  31. Aragon G. 2005. Timing multiple markets: theory and evidence from balanced mutual funds Work. Pap., Ariz. State Univ.
  32. Aragon G. 2007. Share restrictions and asset pricing: evidence from the hedge fund industry. J. Financ. Econ. 83:33–58 [Google Scholar]
  33. Aragon G, Hertzel M, Shi Z. 2013. Why do hedge funds avoid disclosure? Evidence from confidential 13F filings. J. Financ. Quant. Anal. 48:1499–518 [Google Scholar]
  34. Aragon G, Liang B, Park H. 2014. Onshore and offshore hedge funds: Are they twins?. Manag. Sci. 60.1:74–91 [Google Scholar]
  35. Aragon G, Martin JS. 2012. A unique view of hedge fund derivatives usage: safeguard or speculation?. J. Financ. Econ. 105:436–56 [Google Scholar]
  36. Aragon G, Nanda V. 2012. On Tournament behavior in hedge funds: high-water marks, fund liquidation, and managerial stake. Rev. Financ. Stud. 25:937–74 [Google Scholar]
  37. Aragon G, Nanda V. 2015. Strategic delays and clustering in hedge fund reported returns. J. Financ. Quant. Anal. In press
  38. Aragon G, Qian J. 2010. High-water marks and hedge fund compensation Work. Pap., Ariz. State Univ.
  39. Aragon G, Strahan PE. 2012. Hedge funds as liquidity providers: evidence from the Lehman bankruptcy. J. Financ. Econ. 103:570–87 [Google Scholar]
  40. Asness CS, Krail R, Liew JM. 2001. Do hedge funds hedge?. J. Portf. Manag. 28:6–19 [Google Scholar]
  41. Avramov D, Kosowski R, Naik N, Teo M. 2011. Hedge funds, managerial skill, and macroeconomic variables. J. Financ. Econ. 99:672–92 [Google Scholar]
  42. Azlen M. 2011. Hedge funds replication: a blended approach. Work. Pap., Frontier Capital Management LLP
  43. Bali TG, Brown SJ, Caglayan MO. 2011. Do hedge funds' exposures to risk factors predict their future returns?. J. Financ. Econ. 101:36–68 [Google Scholar]
  44. Bali TG, Brown SJ, Caglayan MO. 2012. Systematic risk and the cross-section of hedge fund returns. J. Financ. Econ. 106:114–31 [Google Scholar]
  45. Bali TG, Gokcan S, Liang B. 2007. Value at risk and the cross-section of hedge fund returns. J. Bank. Finance 31:1135–66 [Google Scholar]
  46. Baquero G, Horst JT, Verbeek M. 2005. Survival, look-ahead bias, and the persistence in hedge fund performance. J. Financ. Quant. Anal. 40:493–517 [Google Scholar]
  47. Baquero G, Verbeek M. 2009. A portrait of hedge fund investors: flows, performance and smart money Work. Pap., Erasmus Univ.
  48. Baquero G, Verbeek M. 2014. Hedge fund flows and performance streaks: how investors weight information. Work. Pap., Erasmus Univ.
  49. Bares P, Gibson R, Gyger S. 2003. Performance in the hedge funds industry: an analysis of short- and long-term persistence. J. Altern. Invest. 6:25–41 [Google Scholar]
  50. Bein D, Wander BH. 2002. How to incorporate hedge funds and active portfolio management into an asset allocation framework. J. Wealth Manag. 5:314–19 [Google Scholar]
  51. Bekaert G, Harvey CR. 1995. Time-varying world market integration. J. Finance 50:2403–44 [Google Scholar]
  52. Ben-David I, Franzoni F, Landier A, Moussawi R. 2013. Do hedge funds manipulate stock prices?. J. Finance 68:62383–434 [Google Scholar]
  53. Ben-David I, Franzoni F, Moussawi R. 2012. Hedge funds stock trading during the financial crisis of 2007–2009. Rev. Financ. Stud. 25:11–54 [Google Scholar]
  54. Berk J, Green R. 2004. Mutual fund flows and performance in rational markets. J. Polit. Econ. 112:1269–95 [Google Scholar]
  55. Bernstein P. 1998. Against the Gods: The Remarkable Story of Risk New York: Wiley
  56. Bertsimas D, Kogan L, Lo AW. 2001. Hedging derivative securities and incomplete markets: an epsilon-arbitrage approach. Oper. Res. 49:372–97 [Google Scholar]
  57. Billio M, Frattarolo L, Pelizzon L. 2014. A time varying performance evaluation of hedge fund strategies through aggregation. Bank. Mark. Invest. 129:38–56 [Google Scholar]
  58. Billio M, Getmansky M, Lo A, Pelizzon L. 2012. Econometric measures of connectedness and systemic risk in the finance and insurance sectors. J. Financ. Econ. 104:535–59 [Google Scholar]
  59. Billio M, Getmansky M, Pelizzon L. 2009. Non-parametric analysis of hedge fund returns: new insights from high frequency data. J. Altern. Invest. 12:121–38 [Google Scholar]
  60. Billio M, Getmansky M, Pelizzon L. 2012. Dynamic risk exposures in hedge funds. Comput. Stat. Data Anal. 56:3517–32 [Google Scholar]
  61. Billio M, Getmansky M, Pelizzon L. 2013. Crises and hedge fund risk Work. Pap., Univ. Massachusetts, Amherst
  62. Bisias D, Flood M, Lo A, Valavanis S. 2012. A survey of systemic risk analytics. Annu. Rev. Financ. Econ. 4:255–96 [Google Scholar]
  63. Black F. 1986. Noise. J. Finance 41:529–43 [Google Scholar]
  64. Black K. 2006. Improving hedge fund risk exposures by hedging equity market volatility, or how the VIX ate my kurtosis. J. Trading 1:26–15 [Google Scholar]
  65. Blume L, Easley D. 1992. Evolution and market behavior. J. Econ. Theory 58:9–40 [Google Scholar]
  66. Bollen NPB, Pool VK. 2008. Conditional return smoothing in the hedge fund industry. J. Financ. Quant. Anal. 43:267–98 [Google Scholar]
  67. Bollen NPB, Pool VK. 2009. Do hedge fund managers misreport returns? Evidence from the pooled distribution. J. Finance 64:2257–88 [Google Scholar]
  68. Bollen NPB, Pool VK. 2012. Suspicious patterns in hedge fund returns and the risk of fraud. Rev. Financ. Stud. 25:92673–702 [Google Scholar]
  69. Bondarenko O. 2004. Market price of variance risk and performance of hedge funds Work. Pap., Univ. Illinois, Chicago
  70. Boyson N. 2008. Do hedge funds exhibit performance persistence? A new approach. Financ. Anal. J. 64:615–26 [Google Scholar]
  71. Boyson N, Stahel C, Stulz R. 2010. Hedge fund contagion and liquidity shocks. J. Finance 65:51789–816 [Google Scholar]
  72. Brennan T, Lo A. 2011. The origin of behavior. Q. J. Finance 1:55–108 [Google Scholar]
  73. Brennan T, Lo AW, Nguyen T. 2015. Portfolio theory. The Princeton Companion to Applied Mathematics N Higham 648–57 Princeton, NJ: Princeton Univ. Press [Google Scholar]
  74. Brooks C, Kat HM. 2002. The statistical properties of hedge fund index returns and their implications for investors. J. Altern. Invest. 5:226–44 [Google Scholar]
  75. Brown SJ, Fraser T, Liang B. 2008. Hedge fund due diligence: a source of alpha in a hedge fund portfolio strategy. J. Invest. Manag. 6:423–33 [Google Scholar]
  76. Brown SJ, Goetzmann WN. 2003. Hedge funds with style. J. Portf. Manag. 29:101–12 [Google Scholar]
  77. Brown SJ, Goetzmann WN, Ibbotson RG, Ross SA. 1992. Survivorship bias in performance studies. Rev. Financ. Stud. 5:553–80 [Google Scholar]
  78. Brown SJ, Goetzmann WN, Ibbotson RG. 1999. Offshore hedge funds: survival and performance 1989–1995. J. Bus. 72:191–117 [Google Scholar]
  79. Brown SJ, Goetzmann WN, Liang B. 2004. Fees on fees in funds of funds. J. Invest. Manag. 2:39–56 [Google Scholar]
  80. Brown SJ, Goetzmann WN, Liang B, Schwarz C. 2008. Mandatory disclosure and operational risk: evidence from hedge fund registration. J. Finance 63:2785–815 [Google Scholar]
  81. Brown SJ, Goetzmann WN, Liang B, Schwarz C. 2009. Estimating operational risk for hedge funds: the omega score. Financ. Anal. J. 65:43–53 [Google Scholar]
  82. Brown SJ, Goetzmann WN, Liang B, Schwarz C. 2012. Trust and delegation. J. Financ. Econ. 103:2221–34 [Google Scholar]
  83. Brown SJ, Goetzmann WN, Park J. 2000. Hedge funds and the Asian currency crisis. J. Portf. Manag. 26:495–101 [Google Scholar]
  84. Brown SJ, Goetzmann WN, Park J. 2001. Careers and survival: competition and risk in the hedge fund and CTA industry. J. Finance 56:1869–86 [Google Scholar]
  85. Brown SJ, Gregoriou G, Pascalau R. 2011. Diversification in funds of hedge funds: Is it possible to overdiversify?. Rev. Asset Pricing Stud. 2:189–110 [Google Scholar]
  86. Brunnermeier M. 2009. Deciphering the liquidity and credit crunch 2007–2008. J. Econ. Perspect. 23:177–100 [Google Scholar]
  87. Brunnermeier M, Nagel S. 2004. Hedge funds and the technology bubble. J. Finance 59:2013–40 [Google Scholar]
  88. Brunnermeier M, Pedersen LH. 2009. Market liquidity and funding liquidity. Rev. Financ. Stud. 22:2201–38 [Google Scholar]
  89. Buraschi A, Kosowski R, Trojani F. 2014. When there is no place to hide: correlation risk and the cross-section of hedge funds returns. Rev. Financ. Stud. 27:581–616 [Google Scholar]
  90. Cai L, Liang B. 2012a. Asset allocation dynamics in the hedge fund industry. J. Invest. Manag. 10:35–59 [Google Scholar]
  91. Cai L, Liang B. 2012b. On the dynamics of hedge fund strategies. J. Altern. Invest. 14:51–68 [Google Scholar]
  92. Cao C, Chen Y, Liang B, Lo A. 2013. Can hedge funds time market liquidity?. J. Financ. Econ. 109:2493–516 [Google Scholar]
  93. Cao C, Liang B, Lo A, Petrasek L. 2014. Hedge fund ownership and stock market efficiency. Work. Pap., Univ. Massachusetts, Amherst
  94. Capocci D, Hubner G. 2004. Analysis of hedge fund performance. J. Empir. Finance 11:55–89 [Google Scholar]
  95. Carpenter J, Lynch A. 1999. Survivorship bias and attrition effects in measures of performance persistence. J. Financ. Econ. 54:337–74 [Google Scholar]
  96. Cassar G, Gerakos J. 2011. Hedge funds: pricing controls and the smoothing of self-reported returns. Rev. Financ. Stud. 24:1698–734 [Google Scholar]
  97. Cave A, Hubner G, Sougne D. 2011. The market timing skills of hedge funds during the financial crisis. Manag. Finance 38:4–26 [Google Scholar]
  98. Chan N, Getmansky M, Haas S, Lo A. 2004. Systemic risk and hedge funds Presented at NBER Conf. Risks Financ. Inst., Oct. 22–23, Woodstock, VT
  99. Chan N, Getmansky M, Haas S, Lo A. 2006. Do hedge funds increase systemic risk?. Fed. Reserve Bank Atlanta Econ. Rev. 91:449–80 [Google Scholar]
  100. Chan N, Getmansky M, Haas S, Lo A. 2007. Systemic risk and hedge funds. The Risks of Financial Institutions, ed . M Carey, R Stulz 235–338 Chicago, IL: Univ. Chicago Press [Google Scholar]
  101. Chan LKC, Jegadeesh N, Lakonishok J. 1996. Momentum strategies. J. Finance 51:1681–713 [Google Scholar]
  102. Chen Y. 2007. Timing ability in the focus market of hedge funds. J. Invest. Manag. 5:66–98 [Google Scholar]
  103. Chen Y. 2011. Derivatives use and risk taking: evidence from the hedge fund industry. J. Financ. Quant. Anal. 46:41073–106 [Google Scholar]
  104. Chen Y, Liang B. 2007. Do market timing hedge funds time the market?. J. Financ. Quant. Anal. 42:827–56 [Google Scholar]
  105. Chung S, Rosenberg M, Tomeo JF. 2004. Hedge fund of fund allocations using a convergent and divergent strategy approach. J. Altern. Invest. 7:144–53 [Google Scholar]
  106. Cici G, Kempf A, Puetz A. 2015. Caught in the act: how hedge funds manipulate their equity positions. J. Financ. Quant. Anal. In press
  107. Clark KA, Winkelmann KD. 2004. Active risk budgeting in action: understanding hedge fund performance. J. Altern. Invest. 7:335–46 [Google Scholar]
  108. CRMPG-II (Counterparty Risk Management Policy Group II) 2005. Toward greater financial stability: a private sector perspective Rep., CRMPG-II, July 27, accessed July 26, 2015. http://www.crmpolicygroup.org/crmpg2/
  109. Cumming D, Dai N, Shawky H. 2012. Diversification in the hedge fund industry. J. Corp. Finance 18:166–78 [Google Scholar]
  110. Diez de los Rios A, Garcia R. 2011. Assessing and valuing the nonlinear structure of hedge fund returns. J. Appl. Econ. 26:2193–212 [Google Scholar]
  111. Dobzhansky T. 1973. Nothing in biology makes sense except in the light of evolution. Am. Biol. Teach. 35:125–29 [Google Scholar]
  112. Edelman D, Fung W, Hsieh D. 2013. Exploring uncharted territories of the hedge fund industry: empirical characteristics of mega hedge fund firms. J. Financ. Econ. 109:734–58 [Google Scholar]
  113. Edwards FR, Caglayan MO. 2001. Hedge fund performance and manager skill. J. Futures Mark. 21:1003–28 [Google Scholar]
  114. Eichengreen B, Mathieson D, Sharma S, Chadha B, Kodres L, Jansen A. 1998. Hedge funds and financial market dynamics Int. Monet. Fund Occas. Pap. 166, Int. Monetary Fund, Washington, DC
  115. Farmer D. 2002. Market force, ecology and evolution. Ind. Corp. Change 11:895–953 [Google Scholar]
  116. Farmer D, Lo A. 1999. Frontiers of finance: evolution and efficient markets. PNAS 96:9991–92 [Google Scholar]
  117. FCIC (Financ. Crisis Inq. Comm.) 2011. The financial crisis inquiry report. Final Rep., US Gov. Print. Off. http://www.fcic.gov/report
  118. Feffer S, Kundro C. 2003. Understanding and mitigating operational risk in hedge fund investments. Work. Pap., The Capital Markets Company Ltd., United Kingdom
  119. Feng S, Getmansky M, Kapadia N. 2013. Flows: theinvisible handson hedge fund management Work. Pap., Univ. Massachusetts, Amherst [Google Scholar]
  120. Fung W, Hsieh DA. 1997. Empirical characteristics of dynamic trading strategies: the case of hedge funds. Rev. Financ. Stud. 10:275–302 [Google Scholar]
  121. Fung W, Hsieh DA. 2000. Performance characteristics of hedge funds and CTA funds: natural versus spurious biases. J. Financ. Quant. Anal. 35:291–307 [Google Scholar]
  122. Fung W, Hsieh DA. 2001. The risk in hedge fund strategies: theory and evidence from trend followers. Rev. Financ. Stud. 14:313–41 [Google Scholar]
  123. Fung W, Hsieh DA. 2002. Asset-based style factors for hedge funds. Financ. Anal. J. 58:516–27 [Google Scholar]
  124. Fung W, Hsieh DA. 2004. Hedge fund benchmarks: a risk-based approach. Financ. Anal. J. 60:65–80 [Google Scholar]
  125. Fung W, Hsieh DA, Naik N, Ramadorai T. 2008. Hedge funds, performance, risk, and capital formation. J. Finance 63:1777–803 [Google Scholar]
  126. Fung W, Hsieh DA, Tsatsaronis K. 2000. Do hedge funds disrupt emerging markets?. Brookings–Wharton Pap. Financ. Serv. 2000:377–421 [Google Scholar]
  127. Fung H, Xu XE, Yau J. 2002. Global hedge funds: risk, return, and market timing. Financ. Anal. J. 58:619–30 [Google Scholar]
  128. Gao GP, Gao P, Song Z. 2014. Do hedge funds exploit rare disaster concerns? Work. Pap., Cornell Univ.
  129. Gao M, Huang J. 2014. Capitalizing on Capitol Hill: informed trading by hedge fund managers AFA 2012 Chicago Meet. Pap., Fifth Singapore Int. Conf. Finance
  130. Geczy C. 2014. The new diversification: open your eyes to alternatives. J. Portfolio Manag. 40:5146–55 [Google Scholar]
  131. Getmansky M. 2012. The life cycle of hedge funds: fund flows, size and performance. Q. J. Finance 2:11–53 [Google Scholar]
  132. Getmansky M, Liang B, Schwarz C, Wermers R. 2015. Share restrictions and investor flows in the hedge fund industry. Work. Pap., Univ. Massachusetts, Amherst
  133. Getmansky M, Lo A, Makarov I. 2004. An econometric model of serial correlation and illiquidity of hedge fund returns. J. Financ. Econ. 74:529–610 [Google Scholar]
  134. Getmansky M, Lo AW, Mei SX. 2004. Sifting through the wreckage: lessons from recent hedge-fund liquidations. J. Invest. Manag. 2:46–38 [Google Scholar]
  135. Gimein M. 2005. Is a hedge fund shakeout coming soon? This insider thinks so. New York Times Sep. 4
  136. Glode V, Green RC. 2011. Information spill-overs and performance persistence for hedge funds. J. Financ. Econ. 101:1–17 [Google Scholar]
  137. Glosten L, Milgrom P. 1985. Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders. J. Financ. Econ. 13:71–100 [Google Scholar]
  138. Goetzmann WN, Ingersoll JE, Ross SA. 2003. High-water marks and hedge fund management contracts. J. Finance 58:1685–717 [Google Scholar]
  139. Goldman Sachs & Co., Financial Risk Management Ltd 1999. The hedge fund “industry” and absolute return funds. J. Altern. Invest. 1:411–27 [Google Scholar]
  140. Goldman Sachs Asset Management 2007. The quant liquidity crunch. August, Goldman Sachs Global Quantitative Equity Group
  141. Gorton G, Metrick A. 2012. Securitized banking and the run on repo. J. Financ. Econ. 104:425–51 [Google Scholar]
  142. Griffin J, Xu J. 2009. How smart are the smart guys? A unique view from hedge fund stock holdings. Rev. Financ. Stud. 22:2331–70 [Google Scholar]
  143. Grossman S. 1976. On the efficiency of competitive stock markets where trades have diverse information. J. Finance 31:573–85 [Google Scholar]
  144. Grossman SJ, Stiglitz JE. 1980. On the impossibility of informationally efficient markets. Am. Econ. Rev. 70:3393–408 [Google Scholar]
  145. Guidolin M, Timmermann A. 2008. International asset allocation under regime switching, skew and kurtosis preferences. Rev. Financ. Stud. 21:889–935 [Google Scholar]
  146. Gupta R, Kazemi H. 2007. Factor exposures and hedge fund operational risk: the case of Amaranth. Altern. Invest. Q.23
  147. Gupta A, Liang B. 2005. Do hedge funds have enough capital? A Value-at-Risk approach. J. Financ. Econ. 77:219–53 [Google Scholar]
  148. Hasanhodzic J, Lo A. 2006. Attack of the clones. Alpha Mag. June/July:54–61 [Google Scholar]
  149. Hasanhodzic J, Lo A. 2007. Can hedge-fund returns be replicated? The linear case. J. Invest. Manag. 5:5–45 [Google Scholar]
  150. Hasanhodzic J, Lo A, Patel P. 2009. The CS 130/30 index: a summary and performance comparison. White Pap., Credit Suisse
  151. Hasbrouck J, Schwartz R. 1988. Liquidity and execution costs in equity markets. J. Portf. Manag. 14:10–16 [Google Scholar]
  152. Healy A, Lo A. 2009. Jumping the gates: using beta-overlay strategies to hedge liquidity constraints. J. Invest. Manag. 7:1–20 [Google Scholar]
  153. Heuson A, Hutchinson M, Kumar A. 2015. Assessing hedge fund performance when fund returns are skewed Work. Pap., Univ. Miami
  154. Hendricks D, Patel J, Zeckhauser R. 1997. The J-shape of performance persistence given survivorship bias. Rev. Econ. Stat. 79:2161–66 [Google Scholar]
  155. Henriksson R, Merton R. 1981. On market timing and investment performance: statistical procedures for evaluating forecasting skills. J. Bus. 54:513–33 [Google Scholar]
  156. HFR (Hedge Fund Research, Inc.) 2013. Global hedge fund industry report Rep., HFR, Chicago, IL
  157. Higham N. 2002. Computing the nearest correlation matrix—a problem from finance. IMA J. Numer. Anal. 22:329–43 [Google Scholar]
  158. Hill J, Nadig D, Hougan M. 2015. A Comprehensive Guide to Exchange-Traded Funds (ETFs) Charlottesville, VA: CFA Inst. Res. Found.
  159. Hirshleifer D, Luo G. 2001. On the survival of overconfident traders in a competitive securities market. J. Financ. Mark. 4:73–84 [Google Scholar]
  160. Hodder J, Jackwerth J. 2007. Incentive contracts and hedge fund management. J. Financ. Quant. Anal. 42:811–26 [Google Scholar]
  161. Horst J, Verbeek M. 2007. Fund liquidation, self-selection, and look-ahead bias in the hedge fund industry. Rev. Finance 4:605–32 [Google Scholar]
  162. Howell M. 2001. Fund age and performance. J. Altern. Invest. 4:257–60 [Google Scholar]
  163. Ibbotson R. 2013. Market results for stocks, bonds, bills, and inflation 1926–2012. Morningstar, Ibbotson SBBI 2013 Classic Yearbook
  164. Ibbotson R, Chen P, Zhu K. 2011. The ABCs of hedge funds: alphas, betas, and costs. Financ. Anal. J. 67:15–25 [Google Scholar]
  165. Ineichen A. 2001. The myth of hedge funds: Are hedge funds the fireflies ahead of the storm?. J. Glob. Financ. Mark. 2:434–46 [Google Scholar]
  166. Jagannathan R, Malakhov A, Novikov D. 2010. Do hot hands exist among hedge fund managers? An empirical evaluation. J. Finance 65:217–55 [Google Scholar]
  167. Jen P, Heasman C, Boyatt K. 2001. Alternative asset Strategies: early performance in hedge fund managers Rep., Lazard Asset Manag., London
  168. Jiang H, Kelly B. 2012. Tail risk and hedge fund returns Work. Pap., Univ. Chicago
  169. Joenväärä J, Kosowski R, Tolonen P. 2014. Hedge fund performance: What do we know? Work. Pap., Imperial Coll.
  170. Jorion P. 2007. Risk management for hedge funds with position information. J. Portf. Manag. 34:127–34 [Google Scholar]
  171. Jorion P. 2008. Risk management for event-driven funds. Financ. Anal. J. 64:61–73 [Google Scholar]
  172. Jorion P, Schwarz C. 2014a. Are hedge fund managers systematically misreporting? Or not?. J. Financ. Econ. 111:2311–27 [Google Scholar]
  173. Jorion P, Schwarz C. 2014b. The strategic listing decisions of hedge funds. J. Financ. Quant. Anal. 49:773–96 [Google Scholar]
  174. Jylha P. 2011. Hedge fund return misreporting: incentives and effects. Work. Pap., Aalto Univ.
  175. Kaminski K. 2011. In search of crisis alpha: a short guide to investing in managed futures Rep., Chicago Merc. Exch., Chicago, IL
  176. Kao D. 2002. Battle for alphas: hedge funds versus long-only portfolios. Financ. Anal. J. 58:216–34 [Google Scholar]
  177. Kat H, Menexe F. 2003. Persistence in hedge fund performance: the true value of a track record. J. Altern. Manag. 5:66–72 [Google Scholar]
  178. Kat H, Palaro H. 2005. Who needs hedge funds? A copula-based approach to hedge fund return replication. Work. Pap., Cass Bus. School, City Univ., London
  179. Kat H, Palaro H. 2006a. Replication and evaluation of fund of hedge funds returns. Work. Pap., Cass Bus. School, City Univ., London
  180. Kat H, Palaro H. 2006b. Superstars or average Joes? A replication-based performance evaluation of 1917 individual hedge funds. Work. Pap., Cass Bus. School, City Univ., London
  181. Kazemi H, Li Y. 2009. Market timing of CTAs: an examination of systematic vs. discretionary CTAs. J. Futures Mark. 29:1067–99 [Google Scholar]
  182. Kazemi H, Li Y, Tu F. 2008. Replication and benchmarking of hedge funds. J. Altern. Invest. 11:40–59 [Google Scholar]
  183. Kendall S, Stuart A, Ord J. 1983. The Advanced Theory of Statistics 3 High Wycombe, UK: Griffin, 4th ed..
  184. Khandani A, Lo A. 2007. What happened to the quants in August 2007. J. Invest. Manag. 5:29–78 [Google Scholar]
  185. Khandani A, Lo A. 2011a. Illiquidity premia in asset returns: an empirical analysis of hedge funds, mutual funds, and U.S. equity portfolios. Q. J. Finance 2:205–64 [Google Scholar]
  186. Khandani A, Lo A. 2011b. What happened to the quants in August 2007? Evidence from factors and transactions data. J. Financ. Mark. 14:1–46 [Google Scholar]
  187. Kogan L, Ross S, Wang J, Westerfield M. 2006. The price impact survival and survival of irrational traders. J. Finance 61:195–229 [Google Scholar]
  188. Kosowski R, Naik N, Teo M. 2007. Do hedge funds deliver alpha? A Bayesian and bootstrap analysis. J. Financ. Econ. 84:229–64 [Google Scholar]
  189. Kouwenberg R, Ziemba W. 2007. Incentives and risk taking in hedge funds. J. Bank. Finance 31:3291–310 [Google Scholar]
  190. Kramer D. 2001. Hedge fund disasters: avoiding the next catastrophe. Altern. Invest. Q. 1:5 [Google Scholar]
  191. Kraus A, Stoll H. 1972. Price impacts of block trading on the New York Stock Exchange. J. Finance 27:569–88 [Google Scholar]
  192. Krishnamurthy A. 2010. Amplification mechanisms in liquidity crises. Am. Econ. J. Macroecon. 2:31–30 [Google Scholar]
  193. Kruttli M, Patton A, Ramadorai T. 2014. The impact of hedge funds on asset markets Work. Pap., Oxford Univ.
  194. Kyle A. 1985. Continuous auctions and insider trading. Econometrica 53:1315–35 [Google Scholar]
  195. Lakonishok J, Shleifer A, Vishny R. 1994. Contrarian investment, extrapolation, and risk. J. Finance 49:1541–78 [Google Scholar]
  196. Lee P, Lo A. 2014. Hedge fund beta replication: a five-year retrospective. J. Invest. Manag. 12:5–18 [Google Scholar]
  197. Lhabitant F, Learned M. 2003. Hedge fund diversification: How much is enough?. J. Altern. Invest. 5:323–49 [Google Scholar]
  198. Li H, Zhang X, Zhao R. 2011. Investing in talents: manager characteristics and hedge fund performances. J. Financ. Quant. Anal. 46:59–82 [Google Scholar]
  199. Liang B. 1999. On the performance of hedge funds. Financ. Anal. J. 55:72–85 [Google Scholar]
  200. Liang B. 2000. Hedge fund: the living and the dead. J. Financ. Quant. Anal. 35:309–26 [Google Scholar]
  201. Liang B. 2001. Hedge fund performance: 1990–1999. Financ. Anal. J. 57:11–18 [Google Scholar]
  202. Liang B. 2003. The accuracy of hedge fund returns. J. Portf. Manag. 29:111–22 [Google Scholar]
  203. Liang B. 2004. Alternative investments: CTAs, hedge funds, and funds of funds. J. Invest. Manag. 2:476–93 [Google Scholar]
  204. Liang B, Park H. 2007. Risk measures for hedge funds: a cross-sectional approach. Eur. Financ. Manag. 13:2333–70 [Google Scholar]
  205. Liang B, Park H. 2010. Predicting hedge fund failure: a comparison of risk measures. J. Financ. Quant. Anal. 45:199–222 [Google Scholar]
  206. Lillo F, Farmer D, Mantegna R. 2003. Master curve for price-impact function. Nature 421:129–30 [Google Scholar]
  207. Litterman R. 2013. The quant liquidity crunch of 2007: an unrecognized crowded trade. S. Donald Sussman Award Lecture, Sep. 17. http://18.9.60.50/videos/25938-s-donald-sussman-award-lecture-the-quant-liquidity-crunch-of-2007-an-unrecognized-crowded-trade
  208. Ljung G, Box G. 1978. On a measure of a lack of fit in time series models. Biometrika 65:2297–303 [Google Scholar]
  209. Lo A. 1999. The three P's of total risk management. Financ. Anal. J. 55:13–26 [Google Scholar]
  210. Lo A. 2002. The statistics of Sharpe ratios. Financ. Anal. J. 58:436–52 [Google Scholar]
  211. Lo A. 2004. The Adaptive Markets Hypothesis: market efficiency from an evolutionary perspective. J. Portf. Manag. 30:15–29 [Google Scholar]
  212. Lo A. 2005. Reconciling efficient markets with behavioral finance: the Adaptive Markets Hypothesis. J. Invest. Consult. 7:21–44 [Google Scholar]
  213. Lo A. 2010. Hedge Funds: An Analytic Perspective Princeton, NJ: Princeton Univ. Press
  214. Lo A. 2012. Adaptive markets and the new world order. Financ. Anal. J. 68:18–29 [Google Scholar]
  215. Lo A. 2015. The Adaptive Markets Hypothesis Clarendon Lectures in Finance.. Oxford, UK: Oxford Univ. Press. Forthcoming [Google Scholar]
  216. Lo A, Mamaysky H, Wang J. 2004. Asset prices and trading volume under fixed transaction costs. J. Polit. Econ. 112:1054–90 [Google Scholar]
  217. Lo A, Patel P. 2008. 130/30: the new long-only. J. Portf. Manag. 34:12–38 [Google Scholar]
  218. Lo A, Wang J. 2006. Trading volume: implications of an intertemporal capital asset pricing model. J. Finance 61:2805–40 [Google Scholar]
  219. Lochoff R. 2002. Hedge funds and hope. J. Portf. Manag. 28:492–99 [Google Scholar]
  220. Luo G. 1995. Evolution and market competition. J. Econ. Theory 67:223–50 [Google Scholar]
  221. Luo G. 1998. Market efficiency and natural selection in a commodity futures market. Rev. Financ. Stud. 11:647–74 [Google Scholar]
  222. Luo G. 2001. Natural selection and market efficiency in a futures market with random shocks. J. Futures Mark. 21:489–516 [Google Scholar]
  223. Luo G. 2003. Evolution, efficiency and noise traders in a one-sided auction market. J. Financ. Mark. 6:163–97 [Google Scholar]
  224. Malkiel B, Saha A. 2005. Hedge funds: risk and return. Financ. Anal. J. 61:80–88 [Google Scholar]
  225. Merton R. 1981. On market timing and investment performance. An equilibrium theory of value for market forecasts. J. Bus. 54:3363–406 [Google Scholar]
  226. Mitchell M, Pulvino T. 2001. Characteristics of risk in risk arbitrage. J. Finance 56:2135–75 [Google Scholar]
  227. Montier J. 2007. The myth of exogenous risk and the recent quant problems. Behavioural Investing blog, Sep. 24, accessed January 4, 2014. http://behaviouralinvesting.blogspot.com/2007/09/myth-of-exogenous-risk-and-recent-quant.html
  228. Niederhoffer V. 1998. The Education of a Speculator New York: Wiley
  229. OFR (Office of Financial Research) 2013. 2013 annual report Rep., OFR, Washington, DC
  230. Ozik G, Sadka R. 2014. Skin in the game versus skimming the game: governance, share restrictions, and insider flows. J. Quant. Anal. In press
  231. Pástor L, Stambaugh R. 2003. Liquidity risk and expected stock returns. J. Polit. Econ. 11:3642–85 [Google Scholar]
  232. Panageas S, Westerfield M. 2009. High-water marks: high risk appetites? Convex compensation, long horizons, and portfolio choice. J. Finance 64:11–36 [Google Scholar]
  233. Patton A, Ramadorai T. 2013. On the high-frequency dynamics of hedge fund risk exposures. J. Finance 68:597–635 [Google Scholar]
  234. Patton A, Ramadorai T, Streatfield M. 2015. Change you can believe in? Hedge fund data revisions. J. Finance 70963–99
  235. Qi H, Sun D. 2006. A quadratically convergent Newton method for computing the nearest correlation matrix. SIAM J. Matrix Anal. Appl. 28:360–85 [Google Scholar]
  236. Rajan R. 2005. Has financial development made the world riskier? Presented at The Greenspan Era: Lessons for the Future, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, WY, August 25–27
  237. Ramadorai T. 2012. The secondary market for hedge funds and the closed hedge fund premium. J. Finance 67:479–512 [Google Scholar]
  238. Ramadorai T. 2013. Capacity constraints, investor information, and hedge fund returns. J. Financ. Econ. 107:401–16 [Google Scholar]
  239. Reca B, Sias R, Turtle H. 2013. Hedge fund crowds and mispricing Work. Pap., Univ. Arizona
  240. Reinhart C, Rogoff K. 2009. This Time Is Different: Eight Centuries of Financial Folly Princeton, NJ: Princeton Univ. Press
  241. Roncalli T, Teiletche J. 2008. An alternative approach to alternative beta. J. Financ. Transform. 24:43–52 [Google Scholar]
  242. Roncalli T, Weisang G. 2011. Tracking problems, hedge fund replication, and alternative beta. J. Financ. Transform. 31:19–29 [Google Scholar]
  243. Rothman M. 2007a. Rebalance of large cap quant portfolio. Rep., US Equity Quantitative Strategies, Lehman Brothers Research
  244. Rothman M. 2007b. Turbulent times in Quant Land. Rep., US Equity Quantitative Strategies, Lehman Brothers Research
  245. Rothman M. 2007c. View from QuantLand: Where do we go now? Rep., US Equity Quantitative Strategies, Lehman Brothers Research
  246. Sadka R. 2010. Liquidity risk and the cross-section of hedge-fund returns. J. Financ. Econ. 98:54–71 [Google Scholar]
  247. Sadka R. 2012. Hedge-fund performance and liquidity risk. J. Invest. Manag. 10:60–72 [Google Scholar]
  248. Schneeweis T, Spurgin R. 1998. Multi-factor analysis of hedge fund, managed futures, and mutual fund return and risk characteristics. J. Altern. Invest. 1:1–24 [Google Scholar]
  249. Schneeweis T, Kazemi H, Szado E. 2011. Hedge fund database “deconstruction”: Are hedge fund databases half full or half empty?. J. Altern. Invest. 14:65–88 [Google Scholar]
  250. Schneeweis T, Spurgin R, McCarthy D. 1996. Survivor bias in commodity trading advisor performance. J. Futures Mark. 16:7757–72 [Google Scholar]
  251. Schumpeter J. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process New York: McGraw-Hill
  252. SEC (U.S. Securities and Exchange Commission) 2013. Annual staff report relating to the use of data collected from private fund systemic risk reports https://www.sec.gov/news/studies/2013/im-annualreport-072513.pdf
  253. Shiller R. 2005. ‘Irrational exuberance’—again. CNN Money Jan. 25, accessed Jan. 4, 2014. http://money.cnn.com/2005/01/13/real_estate/realestate_shiller1_0502/
  254. Stemme K, Slattery P. 2002. Hedge fund investments: do it yourself or hire a contractor?. J. Altern. Invest. 1:Spec. Issue60–68 [Google Scholar]
  255. Sun Z, Wang A, Zheng L. 2012. The road less traveled: strategy distinctiveness and hedge fund performance. Rev. Financ. Stud. 25:196–143 [Google Scholar]
  256. Teo M. 2009. The geography of hedge funds. Rev. Financ. Stud. 22:3531–61 [Google Scholar]
  257. Teo M. 2011. The liquidity risk of liquid hedge funds. J. Financ. Econ. 100:124–44 [Google Scholar]
  258. Tiniç S. 1972. The economics of liquidity services. Q. J. Econ. 86:79–93 [Google Scholar]
  259. Titman S, Tiu C. 2011. Do the best hedge funds hedge?. Rev. Financ. Stud. 24:123–68 [Google Scholar]
  260. Treynor J, Mazuy K. 1966. Can mutual funds outguess the market?. Harvard Bus. Rev. 44:131–36 [Google Scholar]
  261. Tuchschmid N, Wallerstein E, Zaker S. 2010. How do hedge fund clones manage the real world?. J. Altern. Invest. 12:37–50 [Google Scholar]
  262. US Treasury 2013. Legacy securities public-private investment program update—quarter ended September 30, 2013. October 28, 2013, http://www.treasury.gov/initiatives/financial-stability/reports/Pages/Public-Private-Investment-Program-Quarterly-Report.aspx
  263. Zask E. 2000. Hedge funds: a methodology for hedge fund valuation. J. Altern. Invest. 3:343–46 [Google Scholar]
/content/journals/10.1146/annurev-financial-110311-101741
Loading
/content/journals/10.1146/annurev-financial-110311-101741
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error