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RESEARCH PAPERS | ALTERNATIVE INVESTMENTS


Hedge Funds

GENDER DIFFERENCES IN HEDGE FUND PERFORMANCE PERSISTENCE
William Joseph Klubinski, Thanos Verousis, and Fanis Tsoligkas
2022
This paper analyses gender differences in hedge fund (HF) performance persistence using parametric and non-parametric risk-adjusted-performance persistence indicators. We find evidence consistent with performance persistence, which in relative (risk-adjusted) terms, is more pronounced amongst females, as opposed to male managers, in short to medium-term horizons. We also, observe a complete loss of persistence for the female managers in the long term, which for the male managers prevails and continues throughout all analysed periods. The findings contribute to the debate on the existence of differences in behaviour across males and females. >more


Hedge Funds

RESPONSIBLE HEDGE FUNDS
Hao Liang, Lin Sun, and Melvyn Teo
2022
Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences. >more


Cryptocurrency

VALUE PREMIUM, NETWORK ADOPTION, AND FACTOR PRICING OF CRYPTO ASSETS
Lin William Cong, George Andrew Karolyi, Ke Tang, and Weiyi Zhao
2022
We document characteristics-based return anomalies in a large cross-section of crypto assets. Cryptocurrency returns exhibit momentum in the largest-cap group, reversals in other size groups, and strong crypto value and network adoption premia, from which we derive two novel factors to add to the cryptocurrency version of market, size, and momentum factors. The resulting C-5 model outperforms extant models in pricing the cross-section of crypto assets. We also provide the first comprehensive classification of all major cryptocurrencies based on their economic functionality. We then adopt methodologies from international finance to demonstrate significant market segmentation across token categories, underscoring the importance for considering token categories in investment and regulatory policymaking. >more

Taxation

TAXING CARRIED INTEREST AS ORDINARY INCOME AND THE POTENTIAL IMPACT ON NEW VENTURE FUND FORMATION
John Manuel Barrios, and Yael V. Hochberg
2021
We explore the potential impact of taxation of carried interest at ordinary income rates on the economic attractiveness of new VC fund formation and its potential impact across US states. Our analysis suggests that changing the taxation regime for carried interest from taxation at (long-term) capital gains rates to ordinary income rates would significantly reduce the attractiveness of forming a new fund for the vast majority of funds in U.S. states other than CA, MA and NY. These funds are predominantly smaller, earlier stage funds, and represent a significant proportion of available VC funding sources outside of the traditional Big 3 VC states. Given the importance of VC funding for U.S. innovation, our findings may serve to inform and aid policymakers in their current deliberations as they consider, design, and implement potential new tax laws that will affect the VC industry. >more


Asset Allocation

ASSET ALLOCATION WITH PRIVATE EQUITY
Arthur G. Korteweg, and Mark M. Westerfield
2022
We survey the literature on the private equity partnership arrangement from the perspective of an outside investor (limited partner). We examine how the partnership arrangement fits into a broader portfolio of investments, and we consider the methods and difficulties in performance measurement, both at the fund level and at the asset class level. We follow with a discussion of performance persistence and the skill and pricing power of both general and limited partners. We continue by examining the limited partner's problem of managing commitments and investments over time while diversifying across funds in light of both idiosyncratic and systematic shocks. We close with a summary of recent work on optimal portfolio allocation to private equity. Throughout, we consider how empirical work and theory match the particular institutional details of private equity, and we identify 27 open questions to help guide private equity research forward. >more


VC Valuation

A VALUATION MODEL OF VENTURE CAPITAL-BACKED COMPANIES WITH MULTIPLE FINANCING ROUNDS
Will Gornall, and Ilya A. Strebulaev
2021
This paper develops the first option pricing model of venture capital-backed companies and their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows that preferred contractual features make the most recently issued preferred shares worth on average 56% more than common shares. While future rounds have a negligible impact on most securities, they significantly impair the value of securities with high liquidation multiples or seniority. Counterintuitively, future “investor-friendly” rounds transfer value from current investors to founders and other common shareholders, significantly reducing the value of many preferred protections. Our model-implied valuations predict exit values, price changes, and outcomes. Modeled security values are consistent with prices reported by specialized intermediaries but suggest dramatic underreporting of common share values for tax purposes. >more


Hedge Funds

DIVERSE HEDGE FUNDS
Yan Lu, Narayan Y. Naik, and Melvyn Teo
2021
We explore the value of diversity for hedge funds. We show that fund management teams with heterogeneous educational backgrounds, work experiences, nationalities, genders, and races, outperform homogeneous teams by 3.24% to 7.96% per annum after adjusting for risk. We address endogeneity concerns through (i) difference-in-differences estimates from an event study of diversity-enhancing team transitions and (ii) instrumental variable regressions that exploit the demographic diversity at fund founders' hometowns. Diverse teams outpace homogeneous teams by exploiting a greater variety of long-horizon investment opportunities, avoiding behavioral biases, and eschewing downside risks. Diversity allows funds to circumvent capacity constraints and deliver more persistent performance. >more


ESG Investing

THE COST OF ESG INVESTING
Laura Anne Lindsey, Seth Pruitt, and Christoph Schiller
2021
Even against increasing interest in socially responsible investing mandates, we find that implementing ESG strategies can cost nothing. Modifying optimal portfolio weights to achieve an ESG-investing tilt negligibly affects portfolio performance across a broad range of ESG measures and thresholds. This is because those ESG measures do not provide information about future stock performance, either in relation to risk or mispricing, beyond what is provided by other observable firm characteristics. That the stock market does not reflect significant equilibrium pricing of ESG information is rationalized in a model of responsible investing wherein investors differ in which ESG-related criteria are used to weight their portfolios. >more


ICOs

THE ROLE OF DISCLOSURE AND INFORMATION INTERMEDIARIES IN AN UNREGULATED CAPITAL MARKET: EVIDENCE FROM INITIAL COIN OFFERINGS
Thomas Bourveau, Emmanuel T. De George, Atif Ellahie, and Daniele Macciocchi
2021
Using an international sample of 2,113 initial coin offerings (ICOs), we explore the role of disclosure and information intermediaries in the unregulated crypto-tokens market. First, we document substantial cross-sectional variation in the voluntary disclosure practices of ventures seeking to raise capital through ICOs, such as the extent of information released in a prospectus-type document called a white paper; releasing the technical source code; and communicating through social media platforms. Second, we find that, even with limited disclosure verifiability, ventures with higher levels of disclosure have a greater ability to raise capital. Finally, we find that this association is stronger in the presence of mechanisms that lend credibility to ventures’ voluntary disclosures, such as internal governance practices or external scrutiny from information intermediaries. Overall, our results suggest that voluntary disclosure and information intermediaries facilitate the functioning of ICOs as an alternative capital market. >more


Hedge Funds

ANTICIPATORY TRADING AGAINST DISTRESSED MEGA HEDGE FUNDS
Vikas Agarwal, George O. Aragon, Vikram K. Nanda, and Kelsey D. Wei
2021
We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. In anticipation of a 1% drop in stock ownership by distressed MHFs next quarter, other institutions reduce their stock ownership of the same stocks by 1.79% in the current quarter. A one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutional investors front-run the distressed trades of MHFs and destabilize stock prices. >more


Real Estate

FLATTENING THE CURVE: PANDEMIC-INDUCED REVALUATION OF URBAN REAL ESTATE
Arpit Gupta, Vrinda Mittal, Jonas Peeters, and Stijn Van Nieuwerburgh
2021
We show that the COVID-19 pandemic brought house price and rent declines in city centers, and price and rent increases away from the center, thereby flattening the bid-rent curve in most U.S. metropolitan areas. Across MSAs, the flattening of the bid-rent curve is larger when working from home is more prevalent, housing markets are more regulated, and supply is less elastic. Housing markets predict an urban revival with urban rent growth exceeding suburban rent growth for the foreseeable future, as working from home recedes. >more


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