Preface to Review of Financial Economics special issue on hedge funds

• Published date: 01 April 2016
• Date: 01 April 2016
• DOI: http://doi.org/10.1016/j.rfe.2016.05.001

Preface to Review of Financial Economics special issue on hedge funds

The private investment partnerships known generic ally as hedge

fundshave been the subject ofconsiderable controversyin the academ-

ic literature as well as the popular press.Hedge funds have even been

the focus of recent Hollywood blockbusters (“The big short”) and hit

TV shows (“Billions”). Despitethe attention they receive, manyimpor-

tant questions remain unanswe red about hedge funds and their

activities.

This special issue brings together five papers that explore various

facets of the hedge fund puzzle. The first two paper sp eaks to a core

issue: Do hedge funds, in fact, add va lue for investors? Aiken, Kilic,

and Reed(“Can hedge funds time globalequity markets?”) beginby ex-

ploringthe question of market timingby fund managers. Such timingis

particularlyvaluable in highlyvolatile investmentenvironments, so the

authors examine funds that focus on emerging markets. Overall, they

find little evidence of market timing ability. Furthermore, fundsdon’t

appearto be successful,in general, at choosingthe better performingre-

gions within a given time period. The only broad eviden ce ofsk ill at

timing in this study occurs during the financial crisis and recovery of

2007–2009, during whichfunds appeared tohave managed theirexpo-

sures in ways thatadded value.

The second paper (Fischer, Hanauer, and Heigermoser, “Synthetic

hedge funds”)asks a related question.The authors examine a relatively

newtype of investment vehiclethat in essenceattempts to clone orsyn-

thesize hedge funds in an actively managed mutual fund or passively

managed ETF framework.Research in this area is challenging due to a

variety of data issues, butthe question of whether hedge fund returns

can be obtainedin a more transparent, lowercost framework is an im-

portant one. Overall, the authors here find that the synthetic vehicles

underperform benchmark indices. Actively managed clones do better

than passivelymanaged ones. Market environment matters in thatthe

returns are larger in unusual market conditions.Thus, synthetic funds

don’t appear to be perfect (or even good ) substitutes, at least not to

date.

The next paperby Aggarwal and Boyson considershedge fund per-

formance froma different angle, the genderof the manager (“The per-

formance of female hedge fund managers”). They find no systematic

difference in performance between male and female managed funds.

Survival bias plays an interesting role in that surviving funds with at

least one female manager have be tter performance than male-

managed surviving funds.These findings support the idea that female

managers need to perform better for their fundsto survive. This paper

has been extensively discussed in the financia l press, including such

outlets as Forbesand The Wall Street Journal.

Most largeinvestors who invest in hedgefunds, particularly institu-

tions, don’t restrict themselve s to a single manager or style. So, the

fourth paper in this special issue (Hit aja and Zambruno, “Are smart

Beta strategiessuitable for hedgefunds portfolios”)evaluatesconstruc-

tion of a portfolio of hedge fund managers, focusing on sophisticated

“smart beta”strategies. Hedge fund returns are often distin ctly non-

normal. In such cases,the authors document that incorporating higher

momentscan lead to improved performanceover long periods. A varie-

ty of other portfolio optimization technologies are assessedas well.

The final paper in this issue considers a central issue in the hedge

fund literature, theimpact of activism. Chen and Jung (“Activist hedge

funds and firm disclosure”) show that firms tendto reduce or cease pro-

viding financial guidanceonce an activist hedge fundhas established a

position. This previously undocumented reduced flow of information

is a potentiallynegative consequence of hedge fundactivism. Previous

studies report various positive impacts from activistinvesting, so this

study showsthat there can be undesirableside effects as well.

Bradford D. Jordan

Guest editor

Universityof Kentucky

Reviewof Financial Economics29 (2016) 1

http://dx.doi.org/10.1016/j.rfe.2016.05.001

1058-3300/©2015 Published by ElsevierInc.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe