14 by jizhen1947


									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
       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 
                            1  (1   H )wH

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

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:
                     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

    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
Example: Fidelity’s Magellan Fund
Example: Fidelity’s Magellan Fund

                     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

  Premier source of information on mutual
  The risk-adjusted rating is ranked across
   funds in a style group and stars are
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)

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