Selected Publications
l
_..Do Prime Brokers
Matter in the Search for Informed Hedge Fund Managers? (with George O. Aragon and Ji-Woong Chung),
2023, Management Science 69, 4932-4952.
o Using
the setting of funds of hedge funds (FoFs), we show that prime brokers (PBs)
facilitate investors' search for informed hedge fund managers. We find that
FoFs exhibit PB bias, a disproportionate preference for hedge funds serviced by
their connected PBs. This PB bias is stronger when the cost of hedge fund due
diligence is higher relative to capital and when the FoF's management firm
generates higher prime brokerage fees. PB bias also predicts FoF performance:
the highest PB-bias quartile outperforms the rest by 2.08%–2.45% per annum,
after adjusting for differences in their risks.
l
_..Timescale
Betas and the Cross Section of Equity Returns: Framework, Application, and
Implications for Interpreting the Fama-French Factors (with Francis In and Tong Suk Kim), 2017, Journal
of Empirical Finance 42, 15-39.
o We
show that standard beta pricing models quantify an asset's systematic risk as a
weighted combination of a number of different timescale betas. Given this, we
develop a wavelet-based framework that examines the cross-sectional pricing
implications of isolating these timescale betas. An empirical application to
the Fama-French model reveals that the model's well-known empirical success is
largely due to the beta components associated with a timescale just short of a
business cycle (i.e., wavelet scale 3). This implies that any viable
explanation for the success of the Fama-French model that has been applied to
the Fama-French factors should apply particularly to the scale 3 components of
the factors. We find that a risk-based explanation conforms closely to this
implication.
l
Prime Broker-Level Comovement in Hedge Fund Returns:
Information or Contagion? (with Ji-Woong Chung), 2016, Review of Financial Studies 29,
3321-3353.
o .We document strong comovement in the
returns of hedge funds sharing the same prime broker. This comovement is driven
neither by funds in the same family nor in the same style, and it is distinct
from market-wide and local comovement. The common information hypothesis
attributes this phenomenon to the prime broker providing valuable information
to its hedge fund clients. The prime broker-level contagion hypothesis
attributes the comovement to the prime broker spreading funding liquidity
shocks across its hedge fund clients. We find strong evidence supporting the
common information hypothesis, but limited evidence in favor of the prime
broker-level contagion hypothesis.
l
_..A
Longer Look at the Asymmetric Dependence between Hedge Funds and the Equity
Markets (with
Francis In, Gunky Kim, and Tong Suk Kim), 2010, Journal of Financial and
Quantitative Analysis
45, 763-789.
o .This paper reexamines, at a range of
investment horizons, the asymmetric dependence between hedge fund returns and
market returns. Given the current availability of hedge fund data, the joint
distribution of longer-horizon returns is extracted from the dynamics of
monthly returns using the filtered historical simulation; we then apply the
method based on copula theory to uncover the dependence structure therein.
While the direction of asymmetry remains unchanged, the magnitude of asymmetry
is attenuated considerably as the investment horizon increases. Similar horizon
effects also occur on the tail dependence. Our findings suggest that
nonlinearity in hedge fund exposure to market risk is more short term in
nature, and that hedge funds provide higher benefits of diversification, the
longer the horizon.
Selected Working Papers
l
_..Does Portfolio Disclosure Make Money Smarter? (with Andrew J. Sinclair and Stig J. Xeno),
2021
o .We provide causal evidence that mandatory
portfolio disclosure helps investors evaluate and select hedge fund managers.
Using a staggered difference-in-differences analysis, we demonstrate that
investor capital flows better predict fund performance among funds that
publicly disclose their portfolio holdings. Additional cross-sectional analyses
suggest that this gain in selection ability varies with the informational value
of disclosure. Furthermore, examining investor-level allocations, we find that
institutional investors earn higher returns on their allocations to disclosing
funds. Overall, these results help contribute to the cost-benefit analysis of
mandatory portfolio disclosure.
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on SSRN
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