The standard approaches to estimating minimum variance hedge ratios (MVHRs) are mis-specified when futures prices are subject to price limits. This paper proposes a bivariate tobit-FIGARCH model with maturity effects to estimate dynamic MVHRs using single and multiple period approaches. Simulations and an application to a commodity futures hedge support the proposed approach and highlight the i...

PART TWO: THE CORE-SATELLITE MODEL A recent note discussed a potential solution to excessive hedge fund fees, the Investor Aggregation Model, but highlighted near term obstacles, including industry structure and agency issues. This note discusses a more realistic alternative: a Core-Satellite Model that builds on the experience of the traditional asset management industry and recent development...

This paper describes a hybrid, two-level approach for resolving hedge cues, the problem of the CoNLL 2010 shared task. First, a maximum entropy classifier is applied to identify cue words, using both syntacticand surface-oriented features. Second, a set of manually crafted rules, operating on dependency representations and the output of the classifier, is applied to resolve the scope of the hed...

We develop a flexible simulation-based optimization (SBO) method for the construction of optimal portfolios including hedge funds and other types of alternative investments. This method takes into account the skew and kurtosis of asset returns, the time series structure of asset returns, and the asymmetric nature of investor preferences for gains versus losses. Johnson (1949) translation is use...

A key question is why many globally active firms forgo foreign exchange hedging despite its low costs. We propose an explanation based on incomplete hedging markets that further suggests that operational hedging is often a more effective hedge. We use 10-K filings to construct text-based measures of financial hedging and three offshore activities: the sale of output, the purchase of input, and ...

This paper explores the question of whether hedge funds engage in frontrunning strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds—those suffering large outflows of assets under management—are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advanta...

Eling and Schuhmacher (2007) compared the Sharpe ratio with other performance measures and found virtually identical rank ordering using hedge fund data. They conclude that the choice of performance measure has no critical influence on fund evaluation and that the Sharpe ratio is generally adequate for analyzing hedge funds. Nevertheless, their analysis does not include the class of tailor-made...

It is widely accepted that, when return distributions are non-normal, the use of the Sharpe ratio can lead to misleading conclusions. It is well documented that deviations of hedge fund return distributions from normality are statistically significant. The literature on performance evaluation that takes into account the non-normality of return distributions is a vast one. However, there is anot...

We investigate a game of delegated portfolio management such as hedge funds featuring risk-neutrality, hidden types, and hidden actions. We show that capital gain tax plays the decisive role in solving the incentive problem. We characterize the constrained optimal fee scheme and capital gain tax rate; the fee after taxation must be linear and affected by gains and losses in a low-powered and sy...

We consider situations where a pension plan has opted to hedge its longevity risk using an index-based longevity hedging instrument such as a q-forward or deferred longevity swap. The use of index-based hedges gives rise to basis risk, but benefits, potentially, from lower costs to the hedger and greater liquidity. We focus on quantification of optimal hedge ratios and hedge effectiveness and i...