Markus S. Schwaiger

Changing investment styles: style creep and style gaming in the hedge fund industry

Notwithstanding their common features, hedge funds remain an extremely diverse asset class. Information on fund styles is important for numerous purposes, such as portfolio construction, performance attribution and risk management. With fund self-declaration being prone to (strategic) misclassification, return-based taxonomies grouping funds along similarities in realized returns provide a useful alternative. We provide a consistent classification system of homogeneous groups of hedge funds based on self-organizing maps. Whereas some fund categories such as managed futures are largely consistent in their self-declared strategies, others, especially so-called ‘equity hedge’ funds, display no or very limited return similarities. Furthermore, we also find evidence of fund managers performing undisclosed changes of their trading style over time. Those funds that misclassified themselves once are particularly likely to change their trading style again. Although style self-declaration can, therefore, be quite misleading, our results indicate that hedge funds do not misdeclare their style strategically to improve their relative performance. Copyright

DCF Valuation and Imputed Interest on Equity Increase - Implications of the Austrian Tax System in a Model with Stochastic Profitability

As early as the 1980s, several European countries implemented tax systems with imputed equity interest provisions. Since its tax reform in 2000, Austria has also allowed the deduction of (fictitious) imputed equity interest from the tax base. This paper integrates the resulting equity-related tax benefits into the valuation of corporations. Using the equity method with special attention to the deductibility of imputed equity interest, we calculate the value of a business in a multi-period model. We find that a market-to-book ratio endogenous to the model results. We then demonstrate how to apply the APV method in a model with imputed equity interest. For each business — and thus also for an unlevered company — an adjustment is necessary to account for the tax shield resulting from equity financing. Therefore, an unlevered company that does not use equity tax shields has to be chosen as a common denominator in the application of the APV method, in which a closed-form solution is presented for the value of this tax benefit. Finally, we derive a weighted average cost of capital that considers the deductibility of imputed equity interest. We show that an additional term correcting for equity tax shields is necessary.

DCF Business Valuation with Imputed Interest on the Stock of Equity

In the last two decades several European countries implemented tax systems allowing for the deduction of imputed equity interest from a companys tax base. This paper integrates the tax benefits resulting from imputed interest on the stock of equity into business valuation. Three discounted cash flow valuation methods are used to this end: the equity method, the APV method and the entity method. Intertemporal differences in risk require the use of various risk-adjusted term structures of interest rates in the equity method as well as the APV method. Using the equity method we show that the well-known market-to-book ratio of the constant growth dividend discount model holds in a risk-adjusted form. When applying the APV method with imputed equity interest an adjustment is necessary for each business, also for an unlevered company, to account for the tax shield resulting from equity financing. A closed-form solution is presented for the value of this tax benefit. We furthermore derive the WACC under imputed interest on the stock of equity and the adjustment of the cost of equity which is necessary to derive the WACC as a weighted average of cost of equity and debt.