Wednesday, 26 November 2014
Last updated 10 hours ago
Jun 28 2012 | 9:01am ET
A new academic study asks whether hedge funds make markets inefficient and the answer appears to be 'no.'
“Hedge Fund Herding and Crowded Trades: The Apologists’ Evidence,” is the work of Blerina Bela Reca of the University of Toledo, Richard W. Sias, University of Arizona and Harry J. Turtle, Washington State University. The authors examined hedge funds’ 13F reports (quarterly filings listing their holdings) to analyze whether “these prototypical sophisticated investors are more likely than other professional investors to engage in potentially destabilizing behaviors.”
The authors challenge the notion—as promulgated in both academic studies and the popular press—that hedge funds trade excessively, herd to the latest fad, and drive prices from fundamentals.
Reca et. al. suggest that, contrary to “conventional wisdom” hedge funds herd less than non-hedge fund institutions; are less likely to engage in momentum trading than other institutions; have portfolios with less overlap (i.e., crowded trades) relative to non-hedge fund institutions; and that, on average, hedge fund demand appears to push prices towards equilibrium, whereas non-hedge fund institutions’ demand pushes prices away from equilibrium.
The research was well-received by the Alternative Investment Management Association, a hedge fund lobby group. Christen Thomson, AIMA’s director of external affairs, told FINalternatives:
“AIMA, which recently cooperated with KPMG and Imperial College in London on research about the value of the global hedge fund industry to investors, markets and the broader economy, welcomed the findings of the research.”
The study opens with a 2010 quote from Third Point Capital’s Daniel Loeb:
“Please note that we will no longer discuss investments made prior to our public 13F filings. We have found that discussing our ideas may result in ‘piling on’ by other hedge funds who may subsequently sell at inopportune times resulting in greater hedge fund concentration and volatility, which is not in the interest of our investors.”
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