Study finds that before “swinging for the fences” HF managers are influenced by several factors
May 28th, 2009 | Filed under: Hedge Fund Industry Trends, Today's Post
It’s often assumed that the asymmetry inherent in hedge fund compensation contracts leads managers to “swing for the fences” if they are down. If they hit the ball out of the park, the get a big payday; and if they strike out, they can always try again next year. Although proponents of this theory often overlook the fact that striking out hurts the manager by alienating a generation of fans, the idea generally makes intuitive sense.
But a study we covered back in December showed that managers did not tend to swing for the fences when they were down by mid-year. In fact, the opposite was much more likely: that they tend to lay down sacrifice bunts when they’re ahead by mid-season. In other words, sensing a big year-end payday, winning managers tend to markedly de-risk in the second half of the year.
Nothing to Lose
However, a new study by George Aragon of Arizona State and Vikram Nanda of Georgia Tech suggests that such behavior – to the extent that it does exist – may actually be rife in funds that are in their “incubation stage”. Newly minted funds are much more likely to swing for the fences than existing funds. This makes a lot of sense, of course. It’s as if every game was the last game of that player’s career. He’s got nothing to lose.
With incubating funds exhibiting most of the so-called “tournament behavior”, it turns out that the established funds exhibit virtually no such propensity at all. As the authors put it: More…
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