RESEARCH PAPERS | ALTERNATIVE INVESTMENTS

MARKET DOMINANCE IN THE DIGITAL AGE
Logan P. Emery
2024
I document that the network structure of the online economy significantly contributes to rising industry concentration.  Firms that are central in the online economy benefit more from increased economies of scale, decreased search costs, and network effects resulting from digitalization.  Industries with firms that are more central become more concentrated and central firms have larger increases in market share.  These results are driven by firms’ ability to generate revenue, as evidenced by central firms earning higher risk-adjusted returns and having more positive earnings surprises.  Centrality is also associated with increasing productivity, but profitability only increases for central firms in business-to-consumer industries. >more

CRYPTOCURRENCY PUMP-AND-DUMP SCHEMES
Tao Li, Donghwa Shin, and Baolian Wang
2023
Pump-and-dump schemes (P&Ds) pervade the cryptocurrency market. We find that P&Ds trigger short-term episodes featuring dramatic increases in prices, volume, and volatility. Prices peak within minutes and quick reversals follow. The evidence we document, including price run-ups before P&Ds start, implies that significant wealth transfers between insiders and outsiders occur. Exploiting two natural experiments in which exchanges altered their P&D policies, we show that P&Ds are detrimental to cryptocurrency liquidity and prices. Interestingly, gambling and overconfident investors often participate in P&Ds and some investors exhibit naïve reinforcement learning. We also describe how our findings shed light on manipulation theories. >more

VENTURE CAPITAL AND STARTUP AGGLOMERATION
Jun Chen, and Michael Ewens
2025
The paper studies venture capital's (VC) role in the geographic clustering of high-growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one-standard-deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow-on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship. >more

DECENTRALIZED CRYPTO GOVERNANCE? TRANSPARENCY AND CONCENTRATION IN ETHEREUM DECISION-MAKING
Cesare Fracassi, Moazzam Khoja, and Fabian Schär
2024
The regulatory treatment of cryptoassets depends primarily on three main governance characteristics: transparency, decentralized decision-making, and the effect of governance on token prices. We offer the first comprehensive analysis of the decision-making process of Ethereum, the leading programmable blockchain. We find that its governance is open and transparent, with all Ethereum Improvement Proposals (EIPs) disclosed and discussed in public venues, engaging thousands of people. At the same time, EIPs are predominantly shaped by a core group of influential authors: 10 individuals are responsible for proposing 68% of all implemented Core EIPs. The success of these proposals is significantly associated with key attributes of the proposers, including their social outreach, community engagement, and company affiliation. Furthermore, we observe a notable concentration in client development, where on average 10 people per client implementation are responsible for 80% of all software changes, and identify stablecoin issuers and oracle providers as potential governance centralization vectors. The governance concentration has been slowly decreasing over time, with the Ethereum Foundation still playing an important role. Finally, we find that governance decisions influence crypto prices: Ether price increases 12% leading to the final discussion of Core EIPs. >more

GAMBLING ON CRYPTO TOKENS?
Sudheer Chava, Fred Hu, and Nikhil Paradkar
2024
We proxy retail investor attention through Google Trends and find that fungible and non-fungible crypto tokens generate greater attention from high--gambling propensity regions. Crypto attention is higher during bubble-like episodes in the crypto market and for more lottery-like tokens. Moreover, retail crypto attention decreases after sports gambling is legalized. Higher token attention is associated with more contributors and higher fundraising. However, consumer credit default rates spike after periods of high crypto attention, but solely in the subprime segment. Overall, our findings suggest that gambling preferences strongly predict retail investor interest in the crypto market. >more

PRIVATE EQUITY FUND REPORTING QUALITY, EXTERNAL MONITORS, AND THIRD-PARTY SERVICE PROVIDERS
Peter D. Easton, Stephannie Larocque, Paul Mason, and Steven Utke
2024
We describe variation in the reporting quality (i.e., accuracy and bias of reported net asset values) of private equity (PE) funds across types of external monitors (investors and auditors) and third-party service providers (valuation specialists, marketers, and administrators). In contrast to public markets, we find only limited evidence that reporting quality varies with the composition and types of investors in PE funds. We observe, however, that reporting quality varies with auditor involvement and the use of third-party service providers; these associations often differ across buyout and venture capital funds and from those observed in public markets. Our evidence is important to investors and regulators, especially now that PE supersedes public markets as the main vehicle to raise capital and as regulators increase their focus on private markets. >more

LEARNING BY INVESTING: ENTREPRENEURIAL SPILLOVERS FROM VENTURE CAPITAL
Josh Lerner, Jinlin Li, and Tong Liu
2023
This paper studies how investing in venture capital (VC) affects the entrepreneurial outcomes of individual limited partners (LPs). Using comprehensive administrative data on entrepreneurial activities and VC fundraising and investments in China, we find that after investing in a successfully launched VC fund, individual LPs create significantly more ventures than do LPs in funds that failed to launch. These new ventures tend to be high-tech firms with better survival rates and more patent activity. Our results suggest that venture investments are a channel through which individual LPs learn. >more

GOLD'S VALUE AS AN INVESTMENT
Urban J. Jermann
2024
This paper presents an approach for pricing gold from investors' perspective. The model is based on no-arbitrage principles with minimal structural assumptions. There is no need to specify investor preferences. When fitted to match 10-year real US Treasury rates the model can replicate the salient fluctuations in the time series of gold prices since 2007. The model is also able to capture key patterns of CME Comex gold futures prices. The model implies that the majority of the value of gold is due to its role as an investment asset. >more

THE DISTRIBUTIONAL CONSEQUENCES OF BITCOIN
Ulrich Bindseil, and Jürgen Schaaf
2024
The original promise of Nakamoto (2008) to provide the world with a better global means of payment has not materialized. Instead, the focus has increasingly shifted to Bitcoin as an investment asset promising high capital gains. Promoters of this investment vision put little effort relating Bitcoin to an economic function which would justify its valuation. While most economists argue that the Bitcoin boom is a speculative bubble that will eventually burst, we analyse in this paper the impact of a Bitcoin-positive scenario in which its price continues to rise in the foreseeable future. What sounds intuitively promising or at least not harmful is problematic: Since Bitcoin does not increase the productive potential of the economy, the consequences of the assumed continued increase in value are essentially redistributive, i.e. the wealth effects on consumption of early Bitcoin holders can only come at the expense of consumption of the rest of society. If the price of Bitcoin rises for good, the existence of Bitcoin impoverishes both non-holders and latecomers. While previous discussions on the redistributive effects of Bitcoin assumed that badly timed trading was a necessary condition for losses, this paper shows that neither poor timing of trades nor holding Bitcoin at all are necessary for impoverishment under a Bitcoin-positive scenario. >more

HOUSE PRICES AND RENTS
Eugene F. Fama, and Kenneth R. French
2024
Variation in monthly metro area house prices unrelated to expected rents clouds the information about future rents in price-rent ratios and lagged changes in house prices. The variation in house prices unrelated to expected rents is, however, correlated across areas, and the problem is mitigated by measuring rent growth regression variables net of their monthly cross-section (across-area) means. This control for price variation unrelated to expected rents substantially enhances the information about future rents that we extract from price-rent ratios and lagged changes in house prices. >more

RETAIL INVESTORS’ CRYPTOCURRENCY INVESTMENTS
Vesa Pursiainen, and Jan Toczynski
2023
We use transaction data gathered by a large fintech firm to study retail investors’ investments in cryptocurrencies. Crypto investors tend to be male, young, high-income, and risk-seeking -- but less so for later adopters. While crypto adoption has increased substantially, most of the trading activity is attributable to a small share of investors. Most crypto investors make very few investments and never monetize them by withdrawing. Initial return experience is a strong predictor of further crypto investments. Men trade more actively than women, and their trading activity responds more strongly to past returns, as well as to initial return experience. >more

HOW DO CRYPTO FLOWS FINANCE SLAVERY? THE ECONOMICS OF PIG BUTCHERING
John M. Griffin, and Kevin Mei
2024
Through blockchain addresses used by ‘‘pig butchering’’ victims, we trace crypto flows and uncover methods commonly used by scammers to obfuscate their activities, including multiple transactions, swapping between cryptocurrencies through DeFi smart contracts, and bridging across blockchains. The perpetrators interact freely with major crypto exchanges, sending over 104,000 small potential inducement payments to build trust with victims. Funds exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance, Huobi, and OKX. These criminal enterprises pay approximately 87 basis points in transaction fees and appear to have recently moved at least $75.3 billion into suspicious exchange deposit accounts, including $15.2 billion from exchanges commonly used by U.S. investors. Our findings highlight how the ‘‘reputable’’ crypto industry provides the common gateways and exit points for massive amounts of criminal capital flows. We hope these findings will help shed light on and ultimately stop these heinous crimes. >more

UNSMOOTHING RETURNS OF ILLIQUID FUNDS
Spencer J. Couts, Andrei S. Gonçalves, and Andrea Rossi
2024
Funds that invest in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth returns when evaluating the risk exposures of these funds. We show that funds investing in similar assets have a common source of spurious autocorrelation, which is not addressed by commonly-used unsmoothing methods, leading to underestimation of systematic risk. To address this issue, we propose a generalization of these unsmoothing techniques and apply it to hedge funds and commercial real estate funds. Our empirical results indicate our method significantly improves the measurement of risk exposures and risk-adjusted performance, with stronger results for more illiquid funds. >more

SHORT CAMPAIGNS BY HEDGE FUNDS
Ian Appel, and Vyacheslav Fos
2023
Recent years have seen the rise of short campaigns by hedge funds. Nearly 80% of campaigns are undertaken by activist hedge funds, particularly those that employ hostile tactics in their long campaigns. Short campaigns are associated with negative abnormal returns of -7%, with aggregate valuation effects similar in magnitude to the gains from long activism campaigns. In contrast to long campaigns, public communication is a critical component of short campaigns. We do not find evidence that such communication is manipulative. Overall, our analysis highlights the importance of short campaigns for understanding the economic impact of activist hedge funds. >more

OWNER INCENTIVES AND PERFORMANCE IN HEALTHCARE: PRIVATE EQUITY INVESTMENT IN NURSING HOMES
Atul Gupta, Sabrina T. Howell, Constantine Yannelis, and Abhinav Gupta
2023
Amid an aging population and a growing role for private equity (PE) in elder care, this paper studies how PE ownership affects U.S. nursing homes using patient-level Medicare data. We show that PE ownership leads to lower-risk patients and increases mortality. After instrumenting for the patient-nursing home match, we recover a local average treatment effect on mortality of 11%. Declines in measures of patient well-being, nurse staffing, and compliance with care standards help to explain the mortality effect. Overall, we conclude that PE has nuanced effects, with adverse outcomes for a subset of patients. >more

INFLATION EXPECTATION AND CRYPTOCURRENCY INVESTMENT
Lin William Cong, Pulak Ghosh, Jiasun Li, and Qihong Ruan
2023
Using proprietary data from a dominant crypto exchange in India and the country’s Household Inflation Expectations Survey, we document a large positive correlation between inflation expectations and individual cryptocurrency purchases. The effect is concentrated in Bitcoin (BTC) and Tether (USDT) and among households in states with higher GDP per capita. There are no significant differences across gender or age groups. The effect also has causal interpretations, as confirmed by using idiosyncratic shocks in current perceived inflation as an instrumental variable for long-term inflation expectations. Our findings suggest that certain cryptocurrencies have already been perceived by households as inflation hedges. >more

DIVERSE HEDGE FUNDS
Yan Lu, Narayan Y. Naik, and Melvyn Teo
2023
Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers that simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management. >more

SPECIALIZATION IN PRIVATE EQUITY AND CORPORATE FINANCIAL DISTRESS
Benjamin Hammer, Robert Loos, Lukas Andreas Oswald, and Bernhard Schwetzler
2023
We investigate the impact of industry specialization of private equity firms on financial distress risk of portfolio companies using Altman’s Z-Score for a sample of 21045 firm-year observations. Difference-in-differences estimates suggest an increase in distress risk through private equity backing. The effect is stronger for specialist-backed firms than for generalist-backed firms relative to a carefully matched control group. However, specialist-backed firms can afford the increase in distress risk because they are less risky than generalist-backed firms before the buyout. Overall, our findings are consistent with the idea that greater idiosyncratic risk in specialized PE portfolios induces more risk-averse target selection. >more

LIMITED PARTNERS VERSUS UNLIMITED MACHINES; ARTIFICIAL INTELLIGENCE AND THE PERFORMANCE OF PRIVATE EQUITY FUNDS
Reiner Braun, Borja Fernández Tamayo, Florencio Lopez-de-Silanes, Ludovic Phalippou, and Natalia Sigrist
2023
As companies and investors globalize, we are increasingly faced with estimation questions about the risk associated with this globalization. When investors invest in China Mobile, Infosys or Vale, they may be rewarded with higher returns, but they are also exposed to additional risk. When Siemens and Apple push for growth in Asia and Latin America, they clearly are exposed to the political and economic turmoil that often characterize these markets. In practical terms, how, if at all, should we adjust for this additional risk? We will begin the paper with an overview of overall country risk, its sources and measures. We will continue with a discussion of sovereign default risk and examine sovereign ratings and credit default swaps (CDS) as measures of that risk. We will extend that discussion to look at country risk from the perspective of equity investors, by looking at equity risk premiums for different countries and consequences for valuation. In the fourth section, we argue that a company’s exposure to country risk should not be determined by where it is incorporated and traded. By that measure, neither Coca Cola nor Nestle are exposed to country risk. Exposure to country risk should come from a company’s operations, making country risk a critical component of the valuation of almost every large multinational corporation. In the final section, we will also look at how to move across currencies in valuation and capital budgeting, and how to avoid mismatching errors. >more

WHAT PRIVATE EQUITY DOES DIFFERENTLY: EVIDENCE FROM LIFE INSURANCE
Divya Kirti, and Natasha Sarin
2023
How do private equity firms impact their portfolio companies? We study this question using comprehensive data on their investments in the life insurance industry, which grew ten-fold from $23 billion to $250 billion between 2009 and 2014. Private equity-backed insurers exhibit superior returns. But there is no evidence that this is a consequence of general partners' skill. Rather, private equity firms increase the asset risk of their subsidiaries without commensurate capital charges and decrease tax liabilities. Results based on high-frequency event studies and matching techniques support a causal interpretation. Indeed, private equity firms deliver these changes to their subsidiaries within days of taking over. This improves insurers' performance, but also introduces risks that rating agencies appear to ignore. >more

THE EFFECTS OF CRYPTOCURRENCY WEALTH ON HOUSEHOLD CONSUMPTION AND INVESTMENT
Darren Aiello, Tetyana Balyuk, Marco Di Maggio, Mark J. Johnson, Scott R. Baker, and Jason D. Kotter
2023
This paper uses transaction-level data across millions of accounts to identify cryptocurrency investors and evaluate how fluctuations in individual crypto wealth affect household consumption, investment, and local real estate markets. We estimate an MPC out of unrealized crypto gains of $0.08, mostly driven by increases in cash/check spending and mortgages. Moreover, households sell crypto to increase both discretionary as well as housing spending. As a result, crypto wealth causes house price appreciation—counties with higher crypto exposure experience higher growth in home values following high crypto returns. Our results indicate that cryptocurrencies have substantial spillover effects on the real economy through consumption and investment into other asset classes. >more

DO YOU EVEN CRYPTO, BRO? CRYPTOCURRENCIES IN HOUSEHOLD FINANCE
Michael Weber, Bernardo Candia, Olivier Coibion, and Yuriy Gorodnichenko
2023
Using repeated large-scale surveys of U.S. households, we study the cryptocurrency investment decisions and motives of households relative to other financial assets. Cryptocurrency holders tend to be young, white, male and more libertarian relative to non-crypto holders. They expect much higher rates of returns for crypto and perceive it as relatively safer than do other households. They also view it as a better hedge against inflation. For those holding cryptocurrencies, changes in Bitcoin prices translate into their purchases of durable goods. Finally, exogenously-provided information about historical returns of cryptocurrencies leads individuals to increase their desired crypto holdings and makes them more likely to actually purchase cryptocurrency subsequently. We compare these views and behaviors to those of households toward other financial assets and argue that cryptocurrency is unique in many of these respects. >more

A NEW WOLF IN TOWN? PUMP-AND-DUMP MANIPULATION IN CRYPTOCURRENCY MARKETS
Anirudh Dhawan, and Tālis J. Putniņš
2022
We investigate the puzzle of widespread participation in cryptocurrency pump-and-dump manipulation schemes. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes. Analyzing a sample of 355 cases in six months, we find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants. >more

WHAT'S IN YOUR WALLET? THE TAX TREATMENT OF CRYPTOCURRENCIES
Katherine Baer, Ruud A. De Mooij, Shafik Hebous, and Michael Keen
2023
Policymakers are struggling to accommodate cryptocurrencies within tax systems not designed to handle them; this paper reviews the issues that arise. The greatest challenges are for implementation: crypto’s quasi-anonymity is an inherent obstacle to third-party reporting. Design problems arise from crytocurrencies’ dual nature as investment assets and means of payment: more straightforward is a compelling case for corrective taxation of carbon-intensive mining. Ownership is highly concentrated at the top, but many crypto investors have only moderate incomes. The capital gains tax revenue at stake worldwide may be in the tens of billions of dollars, but the more profound risks may ultimately be for VAT/sales taxes. >more

PERFORMANCE MEASUREMENT OF CRYPTO FUNDS
Niclas Dombrowski, Wolfgang Drobetz, and Paul P. Momtaz
2023
Crypto funds (CFs) are a growing intermediary in cryptocurrency markets. We evaluate CF performance using metrics based on alphas, value at risk, lower partial moments, and maximum drawdown. The performance of actively managed CFs is heterogenous: While the average fund in our sample does not outperform the overall cryptocurrency market, there seem to be some few funds with superior skills. Given the non-normal nature of fund returns, the choice of the performance measure affects the rank orders of funds. Compared to the Sharpe ratio, the most commonly applied metric in practice, performance measures based on alphas and maximum drawdown lead to diverging fund rankings. Depending on their ranking of preferences, CF investors should thus consider a bundle of metrics for fund selection and performance measurement. >more

BIRTH ORDER AND FUND MANAGER'S TRADING BEHAVIOR: ROLE OF SIBLING RIVALRY
Vikas Agarwal, Alexander Cochardt, and Vitaly Orlov
2023
This paper investigates the role of birth order on managerial behavior using rich data on familial background of US mutual fund managers. We find that managers who are born later in the sibling hierarchy take on more investment risks relative to first-born managers, but perform worse. Motivated by sensation seeking, later-born managers take extreme style bets, hold more lottery stocks, and report more civil and regulatory violations compared to lower-birth-order managers. Taken together, our findings suggest that birth order-induced sensation seeking tendencies originate from sibling rivalry for limited parental resources during childhood, shape trading behavior, and extend beyond portfolio management. >more

THE ADOPTION OF ARTIFICIAL INTELLIGENCE BY VENTURE CAPITALISTS
Maxime Bonelli
2022
I study how the adoption of artificial intelligence (AI) by venture capitalists (VCs) to screen startups affects the funding of early-stage companies. Using global data on VC investments, I show that after adopting AI, VCs tilt their portfolios towards startups whose business is similar to those already tested by past startups. Within this pool of startups, AI- empowered VCs become better at picking those that survive and receive follow-on funding. At the same time, these VCs’ investments become 18% less likely to result in breakthrough success. I exploit plausibly exogenous variation in VCs’ incentives to automate screening from the introduction of Amazon’s Web Services to establish causality between AI adoption and the above effects. Overall, my results are consistent with AI exploiting past data that are not informative about breakthrough companies. AI adoption by investors may therefore reduce the capital directed towards innovation. >more

THE PERFORMANCE OF PRIVATE EQUITY PORTFOLIO COMPANIES DURING THE COVID-19 PANDEMIC
Paul Lavery, and Nick Wilson
2023
We study the performance of UK PE-backed companies during the COVID-19 pandemic using two methods: a standard difference-in-differences model where we match PE-backed firms to similar, non-PE-backed firms based on pre-pandemic ob-servable firm characteristics, and a novel synthetic difference-in-differences approach from Arkhangelsky et al. (2021). In both cases, we find evidence supporting the outper-formance of PE-backed companies during the pandemic period, albeit using a synthetic approach reduces the magnitude of this outperformance. This is consistent with previ-ous evidence of the performance of PE-backed companies during economic downturns. When we study company insolvency filings over the sample period, we find that PE-backed firms faced a higher probability of insolvency during the pandemic relative to control firms. However, non-PE-backed firms in distress had a higher incidence of liquidation, while PE-owned firms more often negotiated formally with creditors to continue trading. >more

A SURVEY OF PRIVATE DEBT FUNDS
Jorn H. Block, Young Soo Jang, Steven N. Kaplan, and Anna Schulze
2023
Despite its large and increasing size in the U.S. and Europe, there is relatively little research on the private debt (PD) market, particularly compared to the bank and syndicated loan markets. Accordingly, in this paper, we survey U.S. and European investors with private debt assets under management (AuM) of over $300 billion. These investors are primarily direct lending funds. We ask the general partners (GPs) how they source, select, and evaluate deals, how they think of private debt relative to bank and syndicated loan financing, how they monitor their investments, how they interact with private equity (PE) sponsors and how they view the future of the market. The respondents provide primarily cash flow-based loans and believe that they finance companies and leverage levels that banks would not fund. The direct lending funds target unlevered returns that appear high relative to their risk. They use leverage in their funds, but appreciably less than banks and collateralized loan obligation funds (CLOs). They use and negotiate for both financial and incurrence covenants to monitor their investments. The presence of PE sponsors helps them lend more and craft more effective covenants. U.S. and European funds are similar on many dimensions, but the European funds rely less on PE sponsors and compete more with banks. Overall, the private debt market is both different from, but shares characteristics with the bank loan and syndicated loan markets. >more

ACCESSING PRIVATE MARKETS GLOBALLY: CONTRACTS AND COSTS
Wayne Lim
2022
This paper examines contracts and the costs of accessing private markets globally. Contract terms vary by fund region and type. European funds charge lower fees than US funds, but evidence linking regulation to fee compression is weak. Investors’ costs are estimated to be 5% to 26% of committed capital. The fee drag on gross-to-net TVPI is 0.1x to 0.7x and 5% to 8% in annualized terms. While managers set fees that effectively capture excess returns, there is limited evidence of agency costs. Incentive fees are not associated with performance. Instead, higher managerial ownership is a predictor of performance. >more