Essays in Hedge Funds

Smart Money or Smart About Money? Evidence from Hedge Funds: This paper introduces a measure of fund-flow impact, based on a fund's contemporaneous return-flow relation, and demonstrates that the smart-money phenomenon predominantly stems from high-flow-impact funds. A smarter-money strategy, one that concentrates in high-flow-impact funds, fares significantly better than a strategy which concentrates in low-flow-impact funds and earns a premium of 6.5% annually over 1999-2008, after controlling for various risk factors and trading restrictions. Although the effect is strongly apparent for outflows, the analysis shows that a smarter-money-conscious long-only-investment portfolio significantly outperforms the hedge-fund index. The paper suggests that the smart-money effect is not necessarily indicative of superior investor ability to predict manager skill, but rather may reflect the ability of some investors to predict the behavior of other investors whose flow affects fund return. 

Media and Investment Management : This paper studies the relation between the media coverage of funds and their future performance. We classify news items about equity hedge funds over 1999--2008 into three source groups: General newspapers, Specialized magazines, and Corporate Communication. Examining post-exclusive-coverage performance, we document that Corporate-covered funds outperform and General-covered funds underperform, with a performance difference of about 11% annually. Applying a textual analysis to news items, we find that sentiment-related biases do not explain the inter-source return spread. Nevertheless, investor fund flow does not differentially respond to source-based information. The results suggest that the source-based return spread may reflect the extensive costs of processing information across thousands of media sources to generate alpha.