Hedge funds did worse over all in November than they have in any month since April of 2000, according to Financial News’ summary of the latest report from Hedge Fund Research, which will cost you $450 if you want to see the original. Investor capital shrank 2.78% overall, over every kind of strategy. However, as we find in the next post….
…Christmas Always Comes, Anyway
Despite the glum November, there is some reason to believe that it will be a Merry Christmas in hedge fund land after all. As professors Vikas Agarwal, Naveen D. Daniel and Narayan Y. Naik find in a study titled Why is Santa so kind to hedge funds? The December return puzzle! returns tend to spike as managers try to make their holidays a little bit more cheery, just when fees are getting tallied. The professors write:
We find that the average hedge fund returns during December are significantly higher than those during the rest of the year. This December spike cannot be fully explained by increase in the funds’ risk exposures and by higher factor risk premiums in December. We argue that hedge fund contractual features such as performance-linked fee, lockup period, notice period, and redemption period, provide incentives to inflate returns at year-end. Consistent with this notion, we find that the spike is indeed more pronounced among funds with higher incentives. In addition to incentives, we contend that funds with greater opportunities to manage returns, i.e., those with higher volatility and higher exposure to liquidity risk, exhibit greater spike. We find that the spike is indeed higher for funds with greater opportunities to manage returns. Finally, we demonstrate that funds engage in returns management by under-reporting returns earlier in the year and/or by borrowing from January returns in the following year.
Who are these Scrooges working for anyway?
(Good find, Seeking Alpha.)
