Zheng Sun

Institutional Demand Pressure and the Cost of Corporate Loans

Between 2001 and 2007, annual institutional funding in highly leveraged loans went up from

Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

32 billion to

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

426 billion, accounting for nearly 70% of the jump in total syndicated loan issuance over the same period. Did the inflow of institutional funding in the syndicated loan market lead to mispricing of credit? To understand this relation, we look at the institutional demand pressure defined as the number of days a loan remains in syndication. Using market-level and cross-sectional variation in time-on-the-market, we find that a shorter syndication period is associated with a lower final interest rate. The relation is robust to the use of institutional fund flow as an instrument. Furthermore, we find significant price differences between institutional investors’ tranches and banks’ tranches of the same loans, even though they share the same underlying fundamentals. Increasing demand pressure causes the interest rate on institutional tranches to fall below the interest rate on bank tranches. Overall, a one-standard-deviation reduction in average time-on-the-market decreases the interest rate for institutional loans by over 30 basis points per annum. While this effect is significantly larger for loan tranches bought by structured investment vehicles (CDOs), it is not fully explained by their role.

Weighted Elastic Net Penalized Mean-Variance Portfolio Design and Computation

This paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweight their investments in hedge funds located in the same geographical areas and that funds of funds with a stronger local bias exhibit superior performance. However, this local bias of funds of funds adversely impacts the hedge funds by creating excess comovement and local contagion. Overall, our results suggest that while local funds of funds benefit from local performance advantages, their local bias creates market segmentation that could destabilize financial markets.

News and Corporate Bond Liquidity

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.

Reaching for Dividends

It is well known that the out-of-sample performance of Markowitzs mean-variance portfolio criterion can be negatively affected by estimation errors in the mean and covariance. In this paper we address the problem by regularizing the mean-variance objective function with a weighted elastic net penalty. We show that the use of this penalty can be motivated by a robust reformulation of the mean-variance criterion that directly accounts for parameter uncertainty. With this interpretation of the weighted elastic net penalty we derive data-driven techniques for calibrating the weighting parameters based on the level of uncertainty in the parameter estimates. We test our proposed technique on U.S. stock return data, and our results show that the calibrated weighted elastic net penalized portfolio outperforms both the unpenalized portfolio and the uniformly weighted elastic net penalized portfolio. This paper also introduces a novel adaptive support split-Bregman approach which leverages the sparse nature of

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

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Institutional Clientele and Comovement

Both macroeconomic and firm-specific news contain value-relevant information for corporate bonds. In this article, we show that trading volume in corporate bonds spikes before the release of scheduled macroeconomic news but on the days with and after scheduled firm-specific news. Since investors are less likely to be concerned with asymmetric information about macroeconomic than firm-specific news to be released, this result suggests that the anticipated arrival of macroeconomic news promotes speculative trades, whereas the arrival of firm-specific news encourages liquidity trades. Turning to liquidity, we find evidence of reduced informed trading and increased corporate bond liquidity on days with firm-specific news, but not on days with macroeconomic news.

Institutional Stock Trading on Loan Market Information

This paper examines the duration of individual stocks, i.e., the sensitivities of their prices to changes in interest rates. Counter to the intuition from the dividend discount model, we find that stocks that pay higher dividends tend to have longer duration, experiencing greater price declines (increases) when interest rates rise (fall). Using data on mutual fund flows and institutional investor holdings, we find evidence of “reaching for dividends”: when interest rates fall, investors switch more funds to income-oriented equity mutual funds, and the weights of high dividend stocks in the portfolios of incomedependent institutions such as income funds and insurance companies increase. The resulting higher demand for high dividend stocks appears to increase the sensitivities of their prices to interest rate changes, thereby contributing to their long duration puzzle. JEL: G10, G11, G12, G23

The Road Less Traveled: Strategy Distinctiveness 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 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.