The Canadian Hedge Fund Industry: Performance and Market Timing*
Peter Klein(Simon Fraser University)
Daryl Purdy(KCS Fund Strategies Inc.,)
Isaac Schweigert(KCS Fund Strategies Inc.,)
Alexander Vedrashko(Simon Fraser University)

We analyze the risk and return characteristics of Canadian hedge funds based on a comprehensive database we compiled. We find that Canadian hedge funds have higher risk-adjusted performance and different distributional characteristics relative to the global hedge fund indices. We investigate market timing by Canadian hedge funds and find that they do not time the Canadian or global stock and bond markets, but hedge funds in the Managed Futures strategy group time the commodity market. These results are robust to parameter instability and structural changes in the model. We also illustrate the impact of using local and global risk factors to analyze the performance of local investment firms.

*We thank the KCS Fund Strategies for the data and the editor, Hong Yan, the associate editor, anonymous referees, and the discussants at the 2012 NFA meeting in Niagara Falls and the Bank of Canada for their helpful comments.

keywords:

The Effectiveness of Capital Regulation on Bank Behavior in China*
Yishu Fu(Institute of Chinese Financial Studies, Southwestern University of Finance and Economics)
Shih-Cheng Lee(Faculty of Finance, College of Management & Innovation Center for Big Data and Digital Convergence, Yuan Ze University)
Lei Xu(Centre for Applied Financial Studies, School of Commerce, University of South Australia)
Ralf Zurbruegg(School of Accounting and Finance, University of Adelaide)

This paper examines the impact that ownership and governance structures have on how Chinese banks react to regulatory pressure. We find that the current regulatory regime induces banks to increase their capital, but its effectiveness in doing so varies based on whether the bank is listed or not, and also who is the majority shareholder. We also find that the degree of central government ownership and the political ties the chief executive officer of the bank has play an important role in the risk-taking behavior of banks. Overall, our results have a number of policy implications supporting the need to further reduce state ownership of banks in China to mitigate the prevailing moral hazard and dual-agency problems that arise from the government being both the regulator and the majority shareholder.

*The authors wish to thank Shan Li and Takeshi Yamada for the assistance in earlier drafts of the paper, plus the editor (Sudipto Dasgupta), an associate editor and an anonymous referee for constructive comments in leading to the final version. All remaining errors are that of the authors.

keywords:

Predicting Interest Rate Volatility Using Information on the Yield Curve*
Hideyuki Takamizawa(Graduate School of Commerce and Management, Hitotsubashi University)

This study examines whether information on the yield curve is useful for predicting volatility of the yield curve. The information is used within dynamic models by specifying the covariance matrix of changes in yield factors as nonlinear functions of the factors. Using such models, it is found that the information (i) is useful for predicting volatility of the slope factor, achieving the accuracy comparable with the GARCH model; (ii) has incremental value for predicting volatility of the curvature factor when combined with a volatility-specific factor; and (iii) does not much improve prediction of volatility of the level factor once the volatility-specific factor is introduced.

*I am grateful to the anonymous referee for comments, which enabled me to significantly improve this manuscript. This work was supported by JSPS KAKENHI Grant Number 23730212, SEIMEIKAI research grant, and NOMURA Foundation research grant.

keywords:

Market Timing With Moving Averages*
Paskalis Glabadanidis(Department of Accounting and Finance, Business School, University of Adelaide)

I present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value-weighted US decile portfolios sorted by market size, book-to-market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk-adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at-the-money protective put on the underlying buy-and-hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.

*I would like to thank Syed Zamin Ali, Tze Chuan ‘Chewie’ Ang, B. Ross Barmish, Jean Canil, Don Chance, Sudipto Dasgupta, Daisy Doan, Victor Fang, Berowne Hlavaty, Daniel Orlovsky, James Primbs, Bruce Rosser, Vincent Xiang, Takeshi Yamada, Alfred Yawson, Xinwei Zheng, Edward Zychowicz as well as the seminar participants at Deakin University and the University of Adelaide and participants in the 2012 Australasian Finance and Banking conference in Sydney, the 2014 J.P. Morgan quantitative conference in Sydney and the 2013 Midwest Finance Association meetings in Chicago. In addition, I would like to express my gratitude to the editor, Huining Cao, and two anonymous referees for their very detailed and thoughtful comments. Any remaining errors are my own responsibility.

keywords:

Managerial Sharing, Mutual Fund Connections, and Performance*
Cathline Augustiani(GMO)
Lorenzo Casavecchia(Finance Discipline Group, University of Technology Sydney)
Jack Gray(Paul Woolley Centre for the Study of Capital Market Dysfunctionality, University of Technology Sydney)

In this study, we examine the effect of mutual fund connections, through managerial sharing, on performance and stock holding commonalities. Our analysis of return correlations and portfolio holdings indicates that more interconnected funds tend to buy and sell similar stocks, hence increasing the similarity of portfolio holdings and undermining the distinctiveness of their investment strategy. Our results also indicate that highly connected funds significantly underperform weakly connected funds by about 1.4% on a yearly risk-adjusted basis. We show that fund family performance is unaffected by the intensity of fund connections, and that greater fund connections could significantly enhance family-level profit margins.

*We would like to thank Adrian Lee, Marco Navone, Nahid Rahman, Susan Thorp, and two anonymous reviewers for helpful comments. Casavecchia gratefully acknowledges the financial support received from the Finance Discipline Group and the Quantitative Finance Research Centre at the University of Technology Sydney. We acknowledge the technical support provided by Analytic Technologies and the UTS FEIT High-Performance Parallel Computing Linux Clusters for the use of their supercomputers. The opinion and analysis presented herein are those of the authors and do not represent the views of GMO.

keywords: