Significance of hedge funds continues to grow

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Olga Kolokolova, lecturer in finance, is gaining international recognition for her studies into hedge funds.

Olga recently presented her paper Recovering Managerial Risk Taking from Daily Hedge Fund Returns: Incentives at Work? at the American Finance Association. The paper, which analyzed a sample of hedge funds reporting daily returns to Bloomberg, documented a strong seasonal pattern in managerial risk taking.

In particular, the study found that during earlier months of the year poorly performing funds tended to reduce their risk. The reduction is stronger for funds with higher management fees, shorter redemption notice periods, and recently deteriorating performance. Towards the end of a year, poorly performing funds gamble by increasing risk.

The activities of hedge funds have particular relevance to policy makers today because of the sheer amounts that they now invest. Some 70% of all stocks globally are now held by institutional investors rather than individual investors, and Kolokolova says hedge funds form an important part of this switch towards institutional investment. “Hedge funds have all the potential to move and influence markets, and can have a significant impact on the companies in which they own sizeable shareholdings.”

Since 2000 the growth of hedge funds has been exponential, despite some reduction in their assets during the 2007-2008 crisis. Some large pension funds now invest around 8-10% of their funds with hedge funds or other alternative asset classes, while in total hedge funds control up to $3tn in assets under management, according to various estimates.

As institutional investors increase their hedge funds holdings, an important issue arises of potential losses of the investors upon hedge fund liquidation. This issue is addressed by Olga in a recently published paper Recovering Delisting Returns of Hedge Funds.

http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=431927#show1419926

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