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    Investment skill of hedge funds : a holdings-based evaluation

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    MASLENNIKOV-DISSERTATION-2015.pdf (608.7Kb)
    Date
    2015-08
    Author
    Maslennikov, Sergey Nikolaevich
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    Abstract
    In Chapter 1, I provide new compelling evidence that hedge funds possess investment skill. Using the longest-in-literature hedge fund sample with fewer biases, I show that large holdings of past winners earn 7% annual benchmark-adjusted return. This remarkable performance is consistent with the notion that large holdings represent managers' best ideas. My sample goes back to 1980 and does not miss non-surviving hedge funds, or those that do not voluntarily report to commercial databases. It consists of all investment managers that must report to the SEC, except those that I identify as managers other than hedge funds. While publicly available data is not sufficient to identify hedge funds directly, my "reverse identification" method achieves both high sensitivity and specificity. I also find weaker yet significant evidence of investment skill in standard indicators such as average fund performance and performance persistence. Additionally, I study the announcement effect of 13F holdings disclosure on the disclosed stock return and trading volume. In Chapter 2, I provide new evidence on market timing by studying ETF option holdings of hedge funds. I find that market option holdings are economically significant in terms of their impact on the market exposure of the funds. Further, I find significant time variation in market option holdings, which could be due to market timing activity. I find that market option holdings are associated with such fund characteristics as active share and market exposure of the fund due to its stock holdings; this evidence is consistent with options being used for hedging. Increases in aggregate hedge fund industry holdings of market put options predict low market returns. In the cross-section of hedge funds, the top 5% group has market volatility timing skill that is distinguished from luck with a bootstrapping test. Additionally, I measure market timing ability as the average risk-adjusted return on market option holdings, which, due to data limitations, requires additional assumptions about option prices. I find that this market timing ability is close to zero for the average fund but it is negative for heavy option users.
    Department
    Finance
    Description
    text
    Subject
    Hedge fund
    Holdings
    13F
    Performance
    Skill
    Options
    Market timing
    URI
    http://hdl.handle.net/2152/31437
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    © The University of Texas at Austin