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Laxman Pai, Opalesque Asia: New hedge funds incepted in hot markets or amid highest investor interest continue to underperform investable peer funds, revealed a new research paper titled "Strategic timing of hedge fund starts".
What's more, hedge funds opened in hot markets exhibit poor subsequent performance, shorter survival, and higher operational risk. Overall, the strategic timing of hedge fund starts is not in the best interest of investors.
The research paper prepared jointly by Lin Sun (Florida State University), Zheng Sun (University of California) and Lu Zheng (University of California) examine whether hedge fund management companies strategically time fund starts to exploit investor sentiment.
Using three proxies for hedge fund investor sentiment, the paper classifies the state of the market as a hot or cold market. They find significantly more fund inceptions in hot markets than in cold markets.
"We find that on average funds opened in hot markets strongly and significantly underperform peer funds already existing in the market over their lifetime," the research report said.
On the other hand, funds opened in cold markets exhibit largely similar performance to peer funds (or marginal outperformance in some cases).
The difference-in-difference performance (or difference in benchmark-adjusted performance) between funds opened in hot and cold markets is statistically significant under all performance metrics.
The research pointed out ...................... To view our full article Click here
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