14 by jizhen1947

VIEWS: 4 PAGES: 19

									Asset Management

  Lecture 14
Outline for today

  Evaluating hedge funds
  Marking timing: are mutual funds
   successful or not?
  Style analysis for mutual funds
Evaluating Hedge Funds

     Hedge funds
       rarely serve as an investor’s overall
        portfolio.
       Capture temporarily mispriced securities

       Less concerned with diversification

       Alpha-driven

       Sharp-ratio is not appropriate for evaluation
Evaluating Hedge Funds

     When mixing a hedge fund H with a
      baseline passive portfolio M, the optimal
      position of the H in the overall portfolio P
      would be               0
                            wH
                     wH 
                            1  (1   H )wH
                                           0


                 aH
                2 ( eH )                 n
          wH 
           0
                                    H   wi  i
               E ( RM )                  i 1

                  M
                   2
Evaluating Hedge Funds

     When the hedge fund is optimally
      combined with the baseline portfolio, the
      improvement in the Sharpe measure will
      be determined by its information ratio:
                                  2
                     H 
              S S 
               2    2
                              
                      (eH ) 
               P    M
An example of actual performance measurement




        Which portfolio to choose?
        •If the portfolio stands for the entire investment fund
        •If the portfolio is only a subportfolio of a larger fund
        •If this is an active portfolio to be mixed with the index
Difficulties in evaluating hedge funds

   Risk profile and investment strategy
    change rapidly
   Investment in illiquid assets: liquidity
    premium and pricing error
   Long-term risk-return
   Survivorship bias
Market Timing

    market timing
      involves shifting funds between a market-
       index portfolio and a safe asset
      High-beta vs. low-beta strategy
             Constant weight
             of the market
             index (60%)


Approach 1
Market Timing


    Treynor and Mazuy:
     rP  rf  a  b(rM  rf )  c(rM  rf )  eP
                                           2



    Test for a group of mutual funds but
     found little evidence
             Constant weight
             of the market
             index (60%)


Approach 1     Approach 2
Market Timing


    Henriksson and Merton:
 rP  rf  a  b(rM  rf )  c(rM  rf ) D  eP
        D is a dummy
          =1 for rM>rf
          =0 other wise

    Found that funds on average are poor at
     market timing.
Style Analysis

  Introduced by W. Sharpe
  study of mutual fund performance
        Regress fund returns on indexes of a range of assets
        Style: the regression coefficient on each index
        R2: percentage of return variability attributable to style
        1-R2:
             stock selection
             market timing (changes in asset-class weights)
    Over 90% of variation in return could be
     explained by the funds’ allocations to bills, bonds
     and stocks
Style Analysis

  An alternative performance evaluation
   based on CAPM
  Comparison with CAPM:
           CAPM                 Style

      The market index      Style indexes

        Theoretically     Closely tracks the
     prescribed passive     fund’s activity
          portfolio
Example: Fidelity’s Magellan Fund
Example: Fidelity’s Magellan Fund



                     Conclusion:
                     The fund is well presented by
                     three style portfolios.

                     But, do not underestimate the
                     role of stock selection and
                     market timing!
                     The intercept of the
                     regression is actually 0.32%
                     per month
Morningstar

  Premier source of information on mutual
   funds
  The risk-adjusted rating is ranked across
   funds in a style group and stars are
   awarded
2nd case study

    Morningstar, Inc.
        Discuss the rapid changes in the mutual
         fund industry up to the end of 2008.
        Discuss Morningstar’s rating system.
        What are the pros and cons of
         Morningstar’s rating system? How would
         you like to improve it?
    Deadline: April 19 (Sunday)

								
To top