Ashley Wang

Only When the Tide Goes Out: Downside Returns and Hedge Fund Performance

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets, but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by about 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN can predict future fund performance over a horizon as long as 3 years, for both winners and losers, and for funds with few share restrictions.

Dynamic Liquidity Management by Corporate Bond Mutual Funds

This paper explores dynamic liquidity management by 578 open-end corporate bond funds during the period from 2002 to 2014. We find that during tranquil markets, managers of corporate bond funds tend to reduce their holdings of liquid assets such as cash and government bonds to meet investor redemptions, engaging in a “horizontal cut” of their asset allocations along the liquidity spectrum. During periods with heightened macroeconomic uncertainty, however, managers tend to liquidate relatively proportionally across asset classes, pursuing a “vertical cut” and maintaining portfolio liquidity. Consistent with the existence of a target ratio of liquid assets, we find that managers tend to sell illiquid assets to restore their holdings of liquid assets subsequent to investor redemptions, especially amid elevated macroeconomic uncertainty. Turning to individual securities, we find that when liquidating corporate bonds to meet redemptions, managers tend to follow a “liquidity pecking order,” selling relatively liquid corporate bonds first, which could mitigate immediate asset liquidation costs. The micro-level liquidity management practices of corporate bond funds have implications for financial stability of broad markets.

Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by approximately 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN measure can predict future fund performance over a horizon as long as 3 years, for both winners and losers and for funds with few share restrictions.