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Three essays on hedge funds: Disclosures, fees and closings to investment
The hedge fund industry and hedge fund related research have grown rapidly in the last decade. In 1990, hedge funds controlled an estimated $39 billion in assets. At the end of 2006, hedge funds had an estimated $1.72 trillion in assets under management. This dissertation consists of three essays exploring the hedge fund industry. In the first essay, I use the recent controversial and ultimately unsuccessful SEC attempt to increase hedge fund disclosure to examine the value of disclosure to investors. By examining SEC mandated disclosures filed by a large number of hedge funds in February 2006, I am able to construct a measure of operational risk distinct from market risk. Leverage and ownership structures as of December 2005 suggest that lenders and hedge fund equity investors were already aware of hedge fund operational risk characteristics. However, operational risk has no effect on the flow-performance relationship, suggesting that investors either lack this information, or they do not regard it as material. In the second essay, I examine hedge fund management and incentive fee structures and changes as well as the use of redemption fees. Overall, I find hedge funds’ fee structures are related to their other fund characteristics in a manner consistent with the mutual fund area and previous fee theory. I observe management fees are negatively related to fund characteristics that lower administrative overhead and positively related to tax incentives. Incentive fees are positively correlated with return characteristics that raise the total values of managers’ option-like incentive fee contracts. Hedge fund fee changes are found to be a function of pricing power and managers attempting to decrease investor demand in capacity constrained styles while redemption fees are used to protect managers against poor performance. Finally, funds of funds have positively associated incentive and management fees, which create a negative relationship between incentive fees and fund alphas. In the third essay, I examine if hedge fund managers close and reopen funds to investment to preserve performance. While my results show closed hedge funds do experience significantly lower flows, managers’ and management companies’ primary objective is to hoard assets. Hedge funds in capacity constrained styles do not close more often, do not close at lower relative asset levels and do not reopen at lower relative asset levels. Hedge funds reopen to investment to generate additional fees, not when funds are capable of generating out performance. These results suggest even high performance-pay deltas are not strong enough to overcome additional fees generated from larger amounts of assets. Other monitoring mechanisms are necessary to reduce agency costs for investors. ^
Schwarz, Christopher, "Three essays on hedge funds: Disclosures, fees and closings to investment" (2008). Doctoral Dissertations Available from Proquest. AAI3338750.