Bing Liang - Academia.edu (original) (raw)

Papers by Bing Liang

SSRN Electronic Journal, 2020

This study examines the liquidity characteristics of market anomalies and how liquidity affects i... more This study examines the liquidity characteristics of market anomalies and how liquidity affects institutional trading on anomalies. We find that long-short portfolios based on market anomalies have pervasive liquidity exposure. For long-horizon anomalies, the long legs of the portfolios are less liquid and have deteriorating liquidity relative to the short legs. Short-horizon anomaly portfolios exhibit an opposite pattern. Consistent with such liquidity characteristics and institutional liquidity preference, aggregate institutional trades appear to be in the right direction of short-horizon anomalies and in the wrong direction of longhorizon anomalies. Perverse institutional trading on long-horizon anomalies disappears after controlling for liquidity. We further find that liquidity-driven and non-liquidity components of institutional trades have different impact on market mispricing.

Journal of Financial and Quantitative Analysis, 2016

To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbi... more To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk-arbitrage portfolio by 3.7% annually on a risk-adjusted basis, whereas non–hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds’ superior performance does not reflect fund managers’ ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers’ superior performance is attributed to their ability to manage downside risk.

Management Science, 2017

We use a new hedge fund data set from a separate account platform to examine (1) how much of hedg... more We use a new hedge fund data set from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main fund–specific factors, such as managerial reporting discretion and (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We use these properties to estimate that 33% of reported smoothing is due to managerial reporting methods. The platform’s fund-level liquidity is associated with a 1.7% performance reduction on an annual basis. Investor flows chase monthly past performance on the platform but not in the associated funds. This paper was accepted by Neng Wang, finance.

SSRN Electronic Journal, 2011

Using voluntary decisions to limit investment, we investigate if the high payperformance sensitiv... more Using voluntary decisions to limit investment, we investigate if the high payperformance sensitivities of hedge fund managers cause them to avoid overinvestment. Our results show that the primary objective of hedge fund managers is to hoard assets. We find that for funds closed to new investors, performance shifts from outperformance in the pre-closing period to average performance in the post-closing period. Funds that reopen are still too large to regain their outperformance. We also find that funds with higher outflow restrictions are less likely to close and experience a significantly higher performance loss over time. These results suggest that the high pay-performance deltas are not strong enough to prevent overinvestment and are offset by investor outflow restrictions.

SSRN Electronic Journal, 2012

Carolina for helpful comments. We thank Jiahan Li for excellent research assistance.

SSRN Electronic Journal, 2012

To understand the nature of hedge fund managers' skills, we study the implementation of risk arbi... more To understand the nature of hedge fund managers' skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk arbitrage portfolio by 3.7% annually on a risk-adjusted basis, while non-hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds' superior performance does not reflect fund managers' ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers' superior performance is attributed to their ability to manage downside risk.

SSRN Electronic Journal, 2014

for their valuable comments and suggestions. We thank George Aragon and Philip Strahan for provid... more for their valuable comments and suggestions. We thank George Aragon and Philip Strahan for providing their data on shareholdings of Lehman-connected hedge funds. Special thanks to Matt Eichner for extensive discussions of the Lehman Brothers bankruptcy proceedings. We are grateful to Edward Atkinson and Grant Farnsworth for excellent research assistance. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff of the Board of Governors, AlphaSimplex Group, or any of its affiliates and employees.

Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasi... more Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manaager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds may be explained by the nature of this fee arrangement. Fund of funds providers pass on individual hedge fund incentive fees in the form of after-fee returns, although they are in a better position to hedge these fees than are their investors. We examine a new fee arrangement emerging in the industry that may provide better incentives at a lower cost to investors in these funds.

Journal of Financial Economics, 2012

and seminar participants at the Oxford-Man Institute for Quantitative Finance and Rutgers Univers... more and seminar participants at the Oxford-Man Institute for Quantitative Finance and Rutgers University for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. We are grateful to HedgeFundDueDiligence.com for providing their data for this research (http://www.hedgefundduediligence.com/). NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Journal of Financial Economics, 2013

We explore a new dimension of fund managers' timing ability by examining whether they can time ma... more We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0-5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.

The Journal of Finance, 2008

ABSTRACTMandatory disclosure is a regulatory tool intended to allow market participants to assess... more ABSTRACTMandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow‐performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.

This paper examines liquidity premium focusing on the difference between offshore and onshore hed... more This paper examines liquidity premium focusing on the difference between offshore and onshore hedge funds. Due to tax provisions and regulatory concerns, offshore and onshore hedge funds have different legal structures, which lead to differences in share restrictions such as a lockup provision. We find that offshore investors collect higher illiquidity premium when their investment has the same level of share illiquidity as the investment of onshore investors. Introducing a lockup provision increases the abnormal return by 4.4 % per year for offshore funds compared with only 2.7 % for onshore funds during the period of 1994-2005. We argue that the difference is explained by the stronger relationship between share illiquidity and asset illiquidity in offshore hedge funds. We also find that the benefit of offshore investors is maximized when they invest in offshore hedge funds that are not affected by onshore funds through a master-feeder structure.

SSRN Electronic Journal, 2007

This paper studies the effect of share restrictions on the flow-performance relation of individua... more This paper studies the effect of share restrictions on the flow-performance relation of individual hedge funds. As such, we reconcile previous research that shows conflicting results for this relation. Specifically, we find that hedge funds exhibit a convex flow-performance relation in the absence of share restrictions (similar to mutual funds), but exhibit a concave relation in the presence of restrictions-our evidence is consistent with both a direct effect of restrictions and an indirect effect that is due to endogenizing of restrictions by investors. Further, we find that the "live database" exhibits a concave flow-performance relation due to capacity constraints, but that the "defunct database" displays a convex relation due to the extreme (good and bad) performing funds that populate this database. Finally, we find that money is smart, that is, fund flows predict future hedge fund performance; however, this smart money effect is reduced among funds with share restrictions.

This paper examines asset allocation dynamics of hedge funds through conducting optimal changepoi... more This paper examines asset allocation dynamics of hedge funds through conducting optimal changepoint test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that more dynamic hedge funds exhibit significantly better quality than less dynamic funds, signaled by lower return volatility, stricter share restrictions, and high water mark provision. In particular, a higher degree of dynamics is shown to be associated with better risk-adjusted performance at the individual fund level. We find that the degree of a fund's dynamics is closely related to share restrictions. However, the outperformance of highly dynamic funds is robust even after controlling for share restrictions. Sub-period analysis suggests that the superiority of asset allocation dynamics is mostly driven by performance during earlier time periods before the peak of the technology bubble. Fund flow analysis suggests that abnormal returns in the hedge fund industry are diminishing as capital flows in and arbitrage opportunities are not infinitely exploitable.

SSRN Electronic Journal, 2010

Hedge fund managers are largely free to pursue dynamic trading strategies and standard static per... more Hedge fund managers are largely free to pursue dynamic trading strategies and standard static performance appraisal is no longer accurate for evaluating hedge funds. Accordingly, this paper presents some new ways of analyzing hedge fund strategies following a dynamic linear regression model. Statistical residual diagnostics are considered to assess the appropriate use of the model. We unveil dynamic alphas and betas for each investment style during the period of January 1994 to December 2008. We examine the in-sample goodness-of-fit and out-of-sample predictability on hedge fund performance. By simulating a hypothetical trading strategy, we demonstrate that the model-based predictability helps to implement a profitable fund selection process. Finally, timing skills can be directly examined with a dynamic model; we find significant evidence on market timing, volatility timing and liquidity timing, which is consistent with the timing literature in hedge funds.

Management Science, 2014

Contrary to offshore hedge funds, U.S.-domiciled (“onshore”) funds are subject to strict marketin... more Contrary to offshore hedge funds, U.S.-domiciled (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, a limited number of investors, and taxable accounts. We exploit these differences to test predictions about organizational design, investment strategy, capital flows, and fund performance. We find that onshore funds are associated with greater share restrictions, more liquid assets, and a reduced sensitivity of capital flows to superior past performance. We also find some evidence that onshore funds outperform offshore funds, depending on the sample period. The results suggest that a fund's investment and financial policies reflect differences in investor clienteles and the regulatory environment. This paper was accepted by Wei Xiong, finance.

Journal of Financial and Quantitative Analysis, 2009

This paper compares downside risk measures that incorporate higher return moments with traditiona... more This paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure. When controlling for investment strategies, performance, fund age, size, lockup, high-water mark, and leverage, we find that funds with larger downside risk have a higher hazard rate. However, standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model. Further, we find that liquidation does not necessarily mean failure in the hedge fund industry. By reexamining the attrition rate, we show that the real failure rate of 3.1% is lower than the attrition rate of 8.7% on an annual basis during the period of 1995–2004.

Using two large hedge fund databases, this paper empirically tests the presence and significance ... more Using two large hedge fund databases, this paper empirically tests the presence and significance of a cross-sectional relation between hedge fund returns and value at risk (VaR). The univariate and bivariate portfolio-level analyses as well as the fund-level regression results indicate a significantly positive relation between VaR and the cross-section of expected returns on live funds. During the period of January 1995 to December 2003, the live funds with high VaR outperform those with low VaR by an annual return difference of 9%. This risk-return tradeoff holds even after controlling for age, size, and liquidity factors. Furthermore, the risk profile of defunct funds is found to be different from that of live funds. The relation between downside risk and expected return is found to be negative for defunct funds because taking high risk by these funds can wipe out fund capital, and hence they become defunct. Meanwhile, voluntary closure makes some well performed funds with large assets and low risk fall into the defunct category. Hence, the risk-return relation for defunct funds is more complicated than what implies by survival. We demonstrate how to distinguish live funds from defunct funds on an ex ante basis. A trading rule based on buying the expected to live funds and selling the expected to disappear funds provides an annual profit of 8-10% depending on the investment horizons.

Financial Analysts Journal, 2000

Page 1. Do All-Stars Shine? Evaluation of Analyst Recommendations Hemang Desai, Bing Liang, and A... more Page 1. Do All-Stars Shine? Evaluation of Analyst Recommendations Hemang Desai, Bing Liang, and Ajai K. Singh Using a unique data set, we studied the performance of stock recommendations made by Wall Street Journal all-star analysts. ...

Journal of Financial Economics, 2005

We examine the risk characteristics and capital adequacy of hedge funds through the Valueat-Risk ... more We examine the risk characteristics and capital adequacy of hedge funds through the Valueat-Risk approach. Using extensive data on nearly 1,500 hedge funds, we find only 3.7% live and 10.9% dead funds are undercapitalized as of March 2003. Moreover, the undercapitalized funds are relatively small and constitute a tiny fraction of total fund assets in our sample. Cross-sectionally, the variability in fund capitalization is related to size, investment style, age, and management fee. Hedge fund risk and capitalization also display significant time variation. Traditional risk measures like standard deviation or leverage ratios fail to detect these trends. r

SSRN Electronic Journal, 2020

This study examines the liquidity characteristics of market anomalies and how liquidity affects i... more This study examines the liquidity characteristics of market anomalies and how liquidity affects institutional trading on anomalies. We find that long-short portfolios based on market anomalies have pervasive liquidity exposure. For long-horizon anomalies, the long legs of the portfolios are less liquid and have deteriorating liquidity relative to the short legs. Short-horizon anomaly portfolios exhibit an opposite pattern. Consistent with such liquidity characteristics and institutional liquidity preference, aggregate institutional trades appear to be in the right direction of short-horizon anomalies and in the wrong direction of longhorizon anomalies. Perverse institutional trading on long-horizon anomalies disappears after controlling for liquidity. We further find that liquidity-driven and non-liquidity components of institutional trades have different impact on market mispricing.

Journal of Financial and Quantitative Analysis, 2016

To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbi... more To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk-arbitrage portfolio by 3.7% annually on a risk-adjusted basis, whereas non–hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds’ superior performance does not reflect fund managers’ ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers’ superior performance is attributed to their ability to manage downside risk.

Management Science, 2017

We use a new hedge fund data set from a separate account platform to examine (1) how much of hedg... more We use a new hedge fund data set from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main fund–specific factors, such as managerial reporting discretion and (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We use these properties to estimate that 33% of reported smoothing is due to managerial reporting methods. The platform’s fund-level liquidity is associated with a 1.7% performance reduction on an annual basis. Investor flows chase monthly past performance on the platform but not in the associated funds. This paper was accepted by Neng Wang, finance.

SSRN Electronic Journal, 2011

Using voluntary decisions to limit investment, we investigate if the high payperformance sensitiv... more Using voluntary decisions to limit investment, we investigate if the high payperformance sensitivities of hedge fund managers cause them to avoid overinvestment. Our results show that the primary objective of hedge fund managers is to hoard assets. We find that for funds closed to new investors, performance shifts from outperformance in the pre-closing period to average performance in the post-closing period. Funds that reopen are still too large to regain their outperformance. We also find that funds with higher outflow restrictions are less likely to close and experience a significantly higher performance loss over time. These results suggest that the high pay-performance deltas are not strong enough to prevent overinvestment and are offset by investor outflow restrictions.

SSRN Electronic Journal, 2012

Carolina for helpful comments. We thank Jiahan Li for excellent research assistance.

SSRN Electronic Journal, 2012

To understand the nature of hedge fund managers' skills, we study the implementation of risk arbi... more To understand the nature of hedge fund managers' skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk arbitrage portfolio by 3.7% annually on a risk-adjusted basis, while non-hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds' superior performance does not reflect fund managers' ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers' superior performance is attributed to their ability to manage downside risk.

SSRN Electronic Journal, 2014

for their valuable comments and suggestions. We thank George Aragon and Philip Strahan for provid... more for their valuable comments and suggestions. We thank George Aragon and Philip Strahan for providing their data on shareholdings of Lehman-connected hedge funds. Special thanks to Matt Eichner for extensive discussions of the Lehman Brothers bankruptcy proceedings. We are grateful to Edward Atkinson and Grant Farnsworth for excellent research assistance. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff of the Board of Governors, AlphaSimplex Group, or any of its affiliates and employees.

Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasi... more Funds of funds are an increasingly popular avenue for hedge fund investment. Despite the increasing interest in hedge funds as an alternative asset class, the high degree of fund specific risk and the lack of transparency may give fiduciaries pause. In addition, many of the most attractive hedge funds are closed to new investment. Funds of funds resolve these issues by providing investors with diversification across manaager styles and professional oversight of fund operations that can provide the necessary degree of due diligence. In addition, many such funds hold shares in hedge funds otherwise closed to new investment allowing smaller investors access to the most sought-after managers. However, the diversification, oversight and access comes at the cost of a multiplication of fees paid by the investor. One would expect that the information advantage of funds of funds would more than compensate investors for these fees. Unfortunately, individual hedge funds dominate fund of funds on an after-fee return or Sharpe ratio basis. In this paper we argue that the disappointing after-fee performance of some fund of funds may be explained by the nature of this fee arrangement. Fund of funds providers pass on individual hedge fund incentive fees in the form of after-fee returns, although they are in a better position to hedge these fees than are their investors. We examine a new fee arrangement emerging in the industry that may provide better incentives at a lower cost to investors in these funds.

Journal of Financial Economics, 2012

and seminar participants at the Oxford-Man Institute for Quantitative Finance and Rutgers Univers... more and seminar participants at the Oxford-Man Institute for Quantitative Finance and Rutgers University for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. We are grateful to HedgeFundDueDiligence.com for providing their data for this research (http://www.hedgefundduediligence.com/). NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Journal of Financial Economics, 2013

We explore a new dimension of fund managers' timing ability by examining whether they can time ma... more We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0-5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.

The Journal of Finance, 2008

ABSTRACTMandatory disclosure is a regulatory tool intended to allow market participants to assess... more ABSTRACTMandatory disclosure is a regulatory tool intended to allow market participants to assess operational risk. We examine the value of disclosure through the controversial SEC requirement, since overturned, which required major hedge funds to register as investment advisors and file Form ADV disclosures. Leverage and ownership structures suggest that lenders and equity investors were already aware of operational risk. However, operational risk does not mediate flow‐performance relationships. Investors either lack this information or regard it as immaterial. These findings suggest that regulators should account for the endogenous production of information and the marginal benefit of disclosure to different investment clienteles.

This paper examines liquidity premium focusing on the difference between offshore and onshore hed... more This paper examines liquidity premium focusing on the difference between offshore and onshore hedge funds. Due to tax provisions and regulatory concerns, offshore and onshore hedge funds have different legal structures, which lead to differences in share restrictions such as a lockup provision. We find that offshore investors collect higher illiquidity premium when their investment has the same level of share illiquidity as the investment of onshore investors. Introducing a lockup provision increases the abnormal return by 4.4 % per year for offshore funds compared with only 2.7 % for onshore funds during the period of 1994-2005. We argue that the difference is explained by the stronger relationship between share illiquidity and asset illiquidity in offshore hedge funds. We also find that the benefit of offshore investors is maximized when they invest in offshore hedge funds that are not affected by onshore funds through a master-feeder structure.

SSRN Electronic Journal, 2007

This paper studies the effect of share restrictions on the flow-performance relation of individua... more This paper studies the effect of share restrictions on the flow-performance relation of individual hedge funds. As such, we reconcile previous research that shows conflicting results for this relation. Specifically, we find that hedge funds exhibit a convex flow-performance relation in the absence of share restrictions (similar to mutual funds), but exhibit a concave relation in the presence of restrictions-our evidence is consistent with both a direct effect of restrictions and an indirect effect that is due to endogenizing of restrictions by investors. Further, we find that the "live database" exhibits a concave flow-performance relation due to capacity constraints, but that the "defunct database" displays a convex relation due to the extreme (good and bad) performing funds that populate this database. Finally, we find that money is smart, that is, fund flows predict future hedge fund performance; however, this smart money effect is reduced among funds with share restrictions.

This paper examines asset allocation dynamics of hedge funds through conducting optimal changepoi... more This paper examines asset allocation dynamics of hedge funds through conducting optimal changepoint test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that more dynamic hedge funds exhibit significantly better quality than less dynamic funds, signaled by lower return volatility, stricter share restrictions, and high water mark provision. In particular, a higher degree of dynamics is shown to be associated with better risk-adjusted performance at the individual fund level. We find that the degree of a fund's dynamics is closely related to share restrictions. However, the outperformance of highly dynamic funds is robust even after controlling for share restrictions. Sub-period analysis suggests that the superiority of asset allocation dynamics is mostly driven by performance during earlier time periods before the peak of the technology bubble. Fund flow analysis suggests that abnormal returns in the hedge fund industry are diminishing as capital flows in and arbitrage opportunities are not infinitely exploitable.

SSRN Electronic Journal, 2010

Hedge fund managers are largely free to pursue dynamic trading strategies and standard static per... more Hedge fund managers are largely free to pursue dynamic trading strategies and standard static performance appraisal is no longer accurate for evaluating hedge funds. Accordingly, this paper presents some new ways of analyzing hedge fund strategies following a dynamic linear regression model. Statistical residual diagnostics are considered to assess the appropriate use of the model. We unveil dynamic alphas and betas for each investment style during the period of January 1994 to December 2008. We examine the in-sample goodness-of-fit and out-of-sample predictability on hedge fund performance. By simulating a hypothetical trading strategy, we demonstrate that the model-based predictability helps to implement a profitable fund selection process. Finally, timing skills can be directly examined with a dynamic model; we find significant evidence on market timing, volatility timing and liquidity timing, which is consistent with the timing literature in hedge funds.

Management Science, 2014

Contrary to offshore hedge funds, U.S.-domiciled (“onshore”) funds are subject to strict marketin... more Contrary to offshore hedge funds, U.S.-domiciled (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, a limited number of investors, and taxable accounts. We exploit these differences to test predictions about organizational design, investment strategy, capital flows, and fund performance. We find that onshore funds are associated with greater share restrictions, more liquid assets, and a reduced sensitivity of capital flows to superior past performance. We also find some evidence that onshore funds outperform offshore funds, depending on the sample period. The results suggest that a fund's investment and financial policies reflect differences in investor clienteles and the regulatory environment. This paper was accepted by Wei Xiong, finance.

Journal of Financial and Quantitative Analysis, 2009

This paper compares downside risk measures that incorporate higher return moments with traditiona... more This paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure. When controlling for investment strategies, performance, fund age, size, lockup, high-water mark, and leverage, we find that funds with larger downside risk have a higher hazard rate. However, standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model. Further, we find that liquidation does not necessarily mean failure in the hedge fund industry. By reexamining the attrition rate, we show that the real failure rate of 3.1% is lower than the attrition rate of 8.7% on an annual basis during the period of 1995–2004.

Using two large hedge fund databases, this paper empirically tests the presence and significance ... more Using two large hedge fund databases, this paper empirically tests the presence and significance of a cross-sectional relation between hedge fund returns and value at risk (VaR). The univariate and bivariate portfolio-level analyses as well as the fund-level regression results indicate a significantly positive relation between VaR and the cross-section of expected returns on live funds. During the period of January 1995 to December 2003, the live funds with high VaR outperform those with low VaR by an annual return difference of 9%. This risk-return tradeoff holds even after controlling for age, size, and liquidity factors. Furthermore, the risk profile of defunct funds is found to be different from that of live funds. The relation between downside risk and expected return is found to be negative for defunct funds because taking high risk by these funds can wipe out fund capital, and hence they become defunct. Meanwhile, voluntary closure makes some well performed funds with large assets and low risk fall into the defunct category. Hence, the risk-return relation for defunct funds is more complicated than what implies by survival. We demonstrate how to distinguish live funds from defunct funds on an ex ante basis. A trading rule based on buying the expected to live funds and selling the expected to disappear funds provides an annual profit of 8-10% depending on the investment horizons.

Financial Analysts Journal, 2000

Page 1. Do All-Stars Shine? Evaluation of Analyst Recommendations Hemang Desai, Bing Liang, and A... more Page 1. Do All-Stars Shine? Evaluation of Analyst Recommendations Hemang Desai, Bing Liang, and Ajai K. Singh Using a unique data set, we studied the performance of stock recommendations made by Wall Street Journal all-star analysts. ...

Journal of Financial Economics, 2005

We examine the risk characteristics and capital adequacy of hedge funds through the Valueat-Risk ... more We examine the risk characteristics and capital adequacy of hedge funds through the Valueat-Risk approach. Using extensive data on nearly 1,500 hedge funds, we find only 3.7% live and 10.9% dead funds are undercapitalized as of March 2003. Moreover, the undercapitalized funds are relatively small and constitute a tiny fraction of total fund assets in our sample. Cross-sectionally, the variability in fund capitalization is related to size, investment style, age, and management fee. Hedge fund risk and capitalization also display significant time variation. Traditional risk measures like standard deviation or leverage ratios fail to detect these trends. r