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RISK SHIFTING, MANAGER SENTIMENT AND NEW INVESTMENT EFFICIENCY IN MANAGED FUTURES
Title
RISK SHIFTING, MANAGER SENTIMENT AND NEW INVESTMENT EFFICIENCY IN MANAGED FUTURES
Creator
Jiang, Cheng
Date
2017, 2017-05
Description
This dissertation focuses on a subset of hedge fund, Commodity Trading Advisors (CTAs), which has grown in the past 35 years and highlighted...
Show moreThis dissertation focuses on a subset of hedge fund, Commodity Trading Advisors (CTAs), which has grown in the past 35 years and highlighted by its diversification benefit to traditional asset classes. I will study the risk-taking, market timing and market capacity of this type of hedge fund. I study the volatility of an extensive sample of live and defunct Commodity Trading Advisor funds from 1994 to 2013. Utilizing the gross-of-fee return, I document significant mean-reversion in volatility in the time series of CTA funds. I further examine the impact of performance on volatility shift, and find consistent evidence of risk tournament behavior, especially when the CTA industry is performing well. Moreover, the risk shifting of CTA managers depend upon both relative and absolute fund performance. The practice of this conditional risk shifting has benefitted the fund managers at the cost of fund investors. I estimate the average benefit to manager's return income and the average cost to investor's Sharpe ratio. My findings provide a first comprehensive evidence on the risk strategy of CTA funds, suggesting that managerial career concerns do not eliminate the moral hazard problem in the CTA space. The asymmetric nature of performance-based compensation in hedge funds produces a strong incentive for risk-shifting, but empirical research presents mixed evidence of risk-seeking behavior. The driver of the change in risk can also be related to other reasons other than incentive fees. I introduce a behavioral regime-switching model of fund manager sentiment in which Bayesian learning is used to update beliefs about market environment in an effort to predict future performance and anticipate market moves. I use a subset of hedge funds in the managed futures industry between 1994 and 2014 and find that the risk-taking behavior of fund managers is influenced by human emotions but in two distinctly different ways. The capital flow to hedge funds has well-known price pressure and smart money effect. This paper studies the capital flows impact on CTA future performance. It had been observed both in mutual funds and hedge funds that mangers scale their existing holding up or down by using new capital inflow rather than trade new positions. This strategy will generate positive returns for the funds due to the price pressure effect. It is interesting whether it will exist in managed future space. I use Vector auto-regression (VAR) to evaluate a system of 2 variables: capital inflow and future performance. If the relationship is negative, one possible reason could be the market impact that erodes the profit generated by price pressure. Therefore, I will implement a market impact test that investigate the market capacity in terms of Sharpe ratio and t-statistics of alpha.
Ph.D. in Management Science, May 2017
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