When I was in business school, I recall asking my accounting professor why stock prices change in the absence of any new information.  If stock prices really did represent the present value of future cash flows (an allegedly idiosyncratic number), then how could all stock prices crash in tandem – with little or no fundamental rationale?  It’s as if stocks weren’t simply a representation of a company’s economic prospects, but instead had demand and supply characteristics all their own.

This is essentially the question raised in an interesting article by Oliver Dietiker of the University of Basel called “Investor Irrationality and Closed-End Hedge Funds.”

Dietiker jumps right to the point in the opening stanza:

“The purpose of my study is to question the rationality of people investing in hedge funds (HFs). My investigation is based on the following simple proposition: it is irrational to have similar expectations about the future performance of different HFs.”

“How can he question the rationality of investing in hedge funds?” I hear you say (with tongue firmly planted in cheek).   He asks why the discounts or premia attached to new closed-end hedge funds seem to apply to apply across the board to supposedly idiosyncratic investment funds.  After all, if the whole hedge fund value proposition is to deliver uncorrelated returns, then how you apply beliefs about one group of funds to your forecasts for another? More…