Comments on: Academic study breaks with pack on one of the most common assumptions about hedge fund returns http://allaboutalpha.com/blog/2009/03/09/academic-study-breaks-with-pack-on-one-of-the-most-common-assumptions-about-hedge-fund-returns/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Thu, 18 Mar 2010 13:53:53 +0000 http://wordpress.org/?v=abc hourly 1 By: Matthew Pollard http://allaboutalpha.com/blog/2009/03/09/academic-study-breaks-with-pack-on-one-of-the-most-common-assumptions-about-hedge-fund-returns/comment-page-1/#comment-153588 Matthew Pollard Wed, 18 Mar 2009 08:47:19 +0000 http://allaboutalpha.com/blog/?p=4321#comment-153588 This paper misses the point of the Foster and Young criticism, i.e. funds induce negative-skewness to game investors. Short-put exposure does this, but there are virtually unlimited other instruments and positions that also give highly negatively skewed outcomes. Examples: short calls, short straddle, short binary options, short earthquake insurance, writing CDSs, bets in merger arb. These can be synthesized by dynamic strategies as well. The space for gaming strategies is vast, so running some common factor returns against HF returns is not going to settle the question. If you're a gaming HF manager, you probably want to avoid writing puts since everyone thinks about that. You'd want to pick something exotic and uncorrelated to the market, like hurricane/earthquake insurance. This paper misses the point of the Foster and Young criticism, i.e. funds induce negative-skewness to game investors. Short-put exposure does this, but there are virtually unlimited other instruments and positions that also give highly negatively skewed outcomes.

Examples: short calls, short straddle, short binary options, short earthquake insurance, writing CDSs, bets in merger arb. These can be synthesized by dynamic strategies as well.

The space for gaming strategies is vast, so running some common factor returns against HF returns is not going to settle the question. If you’re a gaming HF manager, you probably want to avoid writing puts since everyone thinks about that. You’d want to pick something exotic and uncorrelated to the market, like hurricane/earthquake insurance.

]]> By: Harry M. Kat http://allaboutalpha.com/blog/2009/03/09/academic-study-breaks-with-pack-on-one-of-the-most-common-assumptions-about-hedge-fund-returns/comment-page-1/#comment-153292 Harry M. Kat Wed, 11 Mar 2009 22:59:34 +0000 http://allaboutalpha.com/blog/?p=4321#comment-153292 To detect the presence of a particular risk factor, that factor needs to be paying off, otherwise it doesn't show up in the data. If you look at a bull market, you are unlikely to find the presence of a short put factor. It is there in the background, but because it doesn't pay off, it doesn't show from the data. When the market starts to go south, this changes. The short put pays off more and more often and then you can see that it is there. The Foster and Young comment is a bit naive as well. A short put factor isn't meant to model the actual writing of puts by hedge funds. It is meant to capture the negative skewness in hedge fund returns, which may result from a variety of causes, including leverage (or maybe better collateralized borrowing), investment in illiquid assets, and steamroller-type strategies. To detect the presence of a particular risk factor, that factor needs to be paying off, otherwise it doesn’t show up in the data. If you look at a bull market, you are unlikely to find the presence of a short put factor. It is there in the background, but because it doesn’t pay off, it doesn’t show from the data. When the market starts to go south, this changes. The short put pays off more and more often and then you can see that it is there. The Foster and Young comment is a bit naive as well. A short put factor isn’t meant to model the actual writing of puts by hedge funds. It is meant to capture the negative skewness in hedge fund returns, which may result from a variety of causes, including leverage (or maybe better collateralized borrowing), investment in illiquid assets, and steamroller-type strategies.

]]> By: Academic study: Short-put exposures in hedge funds - Are they … | HedgeFundBoard.com http://allaboutalpha.com/blog/2009/03/09/academic-study-breaks-with-pack-on-one-of-the-most-common-assumptions-about-hedge-fund-returns/comment-page-1/#comment-153242 Academic study: Short-put exposures in hedge funds - Are they … | HedgeFundBoard.com Wed, 11 Mar 2009 02:24:00 +0000 http://allaboutalpha.com/blog/?p=4321#comment-153242 [...] Academic study breaks with pack on one of the most common ... [...] [...] Academic study breaks with pack on one of the most common … [...]

]]> By: Jerome Abernathy http://allaboutalpha.com/blog/2009/03/09/academic-study-breaks-with-pack-on-one-of-the-most-common-assumptions-about-hedge-fund-returns/comment-page-1/#comment-153201 Jerome Abernathy Tue, 10 Mar 2009 13:06:59 +0000 http://allaboutalpha.com/blog/?p=4321#comment-153201 This result is very different from every study I've seen or conducted myself. Thank goodness for peer review... This result is very different from every study I’ve seen or conducted myself. Thank goodness for peer review…

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