Doctoral thesis

Evaluation of alternative managers and strategies

Skillful Hiding: Evaluating hedge fund managers' performance based on what they hide: Mandatory disclosure of hedge fund portfolios has been a hotly debated topic. After much delib ...

Author(s) :

Rama Malladi, PhD

Finance Professor, Financial Analytics & Modeling Practitioner at California State University (USA)

Abstract :

Skillful Hiding: Evaluating hedge fund managers' performance based on what they hide: Mandatory disclosure of hedge fund portfolios has been a hotly debated topic. After much deliberation, the Securities and Exchange Commission (SEC) adopted in July 2011 new guidelines and rules as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This paper studies asset returns of \confidential holdings" or those assets that were not voluntarily disclosed by the U.S.-based hedge funds in the original 13F filings to the SEC. In particular, the proprietary cost hypothesis, that a firm's decision to disclose information to investors is influenced by the concern that such disclosures can damage their competitive position in the market, is tested. In this paper, portfolio returns are analyzed for Confidentiality Treatment (CT) positions, or originally undisclosed positions, and disclosed positions (Non-CT) of hedge funds using the 13F (original filing, or Non-CT) and 13F-HR/A (amended filings, or CT). Hedge funds reveal previously undisclosed positions after a time-lag, due to various reasons explained in this paper. After analyzing returns from 1999 to 2013, we find that in aggregate the CT positions are 1.9 times larger in dollar value, 7.9 times more concentrated as a percent of fund holding, and 5.3 times larger in ownership of underlying asset compared to Non-CT positions. In addition we find that returns of CT and Non- CT portfolios are statistically different, and daily returns of CT positions are lower. We provide a mechanism for regulators and investors to rank fund managers whose CT portfolios have a higher return compared to Non-CT positions. We also find that (1) only 2.68% of the hedge funds are truly skilled, (2) 33.20% are unskilled, and (3) 64.13%, are zero-alpha funds.

Equal-weighted Strategy: Why it outperforms value-weighted strategies? Theory and evidence.: Recent academic papers and practitioner publications suggest that equal-weighted portfolios (or 1/N portfolios) appear to outperform various other portfolio strategies. In addition, as the equal- weighted portfolio does not rely on expected average returns, it is therefore assumed to be more robust compared to other price-weighted or value-weighted strategies. In this paper we provide a theoretical framework to the equal-weighed versus value-weighted equity portfolio model, and demonstrate using simulation as well as real-world data from 1926 to 2014 that an equal-weighted strategy indeed outperforms value-weighted strategies. Moreover, we demonstrate that a significant portion of the excess return is attributable to portfolio rebalancing.

 

 

Date : 15/01/2016
Thesis Committee :

Supervisor: Frank Fabozzi, EDHEC Business School

External reviewer: Bradford Cornell, Caltech

Other committee member: René Garcia, EDHEC Business School

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