Kok Fai Phoon

Moments Analysis in Risk and Performance Measurement

Noting that while hedge funds are well established in the United States and Europe, they have only begun to grow aggressively in Asia, the authors introduce a practical approach to analyzing the risk and performance of Asian hedge funds from the viewpoints of U.S. and Asia-Pacific based equity investors. They focus on the impact of including Asian hedge funds in these portfolios and examine whether the inclusion helps to insulate the overall portfolio when in down markets, capturing the upside and reducing the impact of market volatility during extreme events. They note that their approach alleviates the problems that can arise if hedge fund returns are skewed, leptokurtic, and non-linearly related to the market returns. They conclude that while all funds provided diversification in the sense that they were not perfectly correlated with market index returns, only 32 or 46% of the funds were negatively correlated with the S&P 500 index returns in a down market (defined as the lowest return quartile of the S&P 500). Their results also showed that very few of the funds provided downside protection, upside capture, and low volatility on the down-side. They also found that their results are sensitive to the choice of benchmark and conclude that this makes the methodology suitable for performance and risk measurement relative to existing investments.

Market Structure and Growth Potential of Singapore REITs

Singapore Real Estate Investment Trusts (S-REITs) were first introduced to Singapore in 1998 as part of the Monetary Authority of Singapore (MAS) efforts to develop the financial sector. There are currently twenty-five REITs listed on the Singapore Exchange (SGX). This makes Singapore home to the largest number of REITs in Asia (outside Japan). This chapter provides insights into the development of S-REITs, its risks and return performance, and growth potential. The authors postulate the development of residential REITs in the near-to-medium term after supply and demand and prices of residential properties stabilize in Singapore.

An Equitable Structure for Hedge Fund Incentive Fees

There are a variety of problems in fee structures between hedge fund managers and their clients. Examples here illustrate issues such as the free rider problem and the “claw-back” syndrome that can arise in fee contracts. A different “equalization” process that is both equitable and transparent to investors would involve multiportfolios that give any fund a structure similar to that of a partnership organization, and overcomes the current drawbacks in contracts. Application of this structure should improve fund manager and investor compatibility.

A Heuristic Approach to Asian Hedge Fund Allocation

The authors first note that, unlike traditional investment vehicles, hedge funds seem to produce return distributions with significantly non-normal skewness and kurtosis. Hedge fund managers that apply the mean-variance optimization approach to form optimal portfolios may find that approach no longer appropriate. Moreover, utilizing a portfolio optimizer to perform portfolio allocations will cause what is known as the “butterfly effect”—that is, small changes in inputs, especially mean returns, can cause large changes in the optimal asset weightings. This phenomenon, coupled with the illiquidity of hedge funds, may prompt hedge fund managers to consider alternative approaches to portfolio allocation. In this study, the authors introduce a practical heuristic approach using the semi-variance (that better accounts for non-normality in hedge fund returns) as a measure for downside risk. This heuristic approach is able to provide better forecasts, stable portfolio allocations, and more diversification than the optimization approach. The authors find the “butterfly effect” in their sample of Asian hedge funds when using portfolio optimizers resulting in dramatic changes in optimal weights over time. They also find that their risk-return approach recommends portfolio with higher returns when compared with optimizers. In risk-reward comparisons against the optimizers, the heuristic approach yields the highest return to standard deviation and return to semi-deviation ratio (trade-offs).

Asset Performance Evaluation with the Mean-Variance Ratio

Bai, et al. (2011c) have developed the mean-variance-ratio (MVR) statistics to test the performance among assets for small samples. They have also provided theoretical reasoning to use MVR and proved that their proposed statistic is uniformly most powerful unbiased. In this paper, we illustrate the superiority of the MVR test over the Sharpe ratio (SR) test by applying both tests to analyze the performance of Commodity Trading Advisors (CTAs). Our findings show that while the SR test conclude that most of the CTA funds being analyzed are indistinguishable in their performance, the MVR statistics show that some funds outperformed others. In addition, the SR statistic indicate that one fund significantly outperformed another even when the difference between the two funds becomes insignificant or even changes directions over sub-periods. Moreover, the MVR statistic can detect the changes in the sub-periods.

Mean-Variance and Stochastic Dominance Analysis of Global Exchange-Traded Funds

We employ the stochastic dominance (SD) approach that utilizes the entire return distribution to rank the performance of exchange-traded funds as traditional mean-variance and CAPM approaches may be inappropriate given the nature of non-normal returns. We find second and third-order stochastic dominance relationships amongst the assets and conclude that by investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in exchange-traded fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in an exchange-traded fund’s track record.

Singapore's Financial Market: Challenges and Future Prospects

Singapore has successfully developed into one of the leading international financial centers in a short span of less than half a century. The factors of success can be attributed to time, space, and people. Given the complexity and connectivity of today’s markets, there are many challenges in a fast changing environment marked by huge global capital flows and punctuated by crisis after crisis. This chapter will explain the success of Singapore’s financial market and provide the author’s outlook for the island state’s future prospects in the aftermath of the US debt crisis, the Euro crisis, and likely slowdown in emerging markets. In particular, potential problems due to the voluminous capital flow in a time-compressed manner in the small open economy are highlighted.