Professor of Finance

W. P. Carey School of Business
Arizona State University

Research Interests

  • Capital markets, financial institutions
  • My research interests are mainly in capital markets and the structure, efficiency and risk management practices of the financial services industry, including hedge funds and mutual funds. The list of published and working papers is available below. At ASU, I teach courses in investments and derivatives in our undergraduate and graduate programs.

Working Papers

  1. "Volatility Timing Using ETF Options: Evidence from Hedge Funds" with Shuaiyu Chen and Zhen Shi.
    • Abstract: We find that hedge funds’ ETF option positions predict cross-sectional differences in the future volatility of underlying ETFs. The predictive power is strongest for straddle positions and non-equity ETFs. A tracking portfolio of straddles based on funds’ straddle positions earns quarterly abnormal returns of 7.35%. Net of fees, funds using ETF straddles deliver lower risk and higher benchmark-adjusted returns than nonusers. We also find that hedge funds’ trading in ETF options has a positive impact on ETF option prices and improves price efficiency in individual equity options. We conclude that ETF options are an important venue for informed volatility trading.
  2. "Anticipatory Trading Against Distressed Mega Hedge Funds" with Vikas Agarwal, Vikram Nanda, and Kelsey Wei.
    • Abstract: We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. In anticipation of a 1% drop in stock ownership by distressed MHFs next quarter, other institutions reduce their stock ownership of the same stocks by 1.79% in the current quarter. A one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutional investors front-run the distressed trades of MHFs and destabilize stock prices.
  3. "Fire Sale Risk and Expected Stock Returns," with Min Kim, Revise and Resubmit at Journal of Financial Economics.
    • Abstract: We measure a stock's exposure to fire sale risk through its ownership links to equity mutual funds that experience outáows during periods of systematic outáows from the fund industry. We find that more exposed stocks earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% per annum. Our findings cannot be explained by several known determinants of average returns and are consistent with the ex-ante pricing of the risk of future fire sales. We conclude that stocks' exposures to risks inherited from the constraints of shareholders have important implications for stock prices.
  4. "Responsible Investments: Costs and Benefits for University Endowment Funds," with Yuxiang Jiang, Juha Joenvaara, and Cristian Tiu.
    • Abstract: We find that university endowment funds experience 6% higher donations following the adoption of socially responsible investment (SRI) policies, providing strong evidence that SRI policies influence capital flows to universities. These effects are primarily driven by donors who derive more nonpecuniary utility from SRI objectives. However, SRI funds have greater management costs and portfolio return volatility than other funds and do not experience higher asset growth rates (donations plus investment income). Finally, SRI policies are associated with other university benefits, including enhancements to the fund’s risk management practices, more student applications, and more funding for faculty research in sustainability science.
  5. "Exploration or Exploitation? Hedge Funds in Venture Capital," with Emma Li and Laura Lindsey.
    • Abstract: We study the role of hedge funds in the venture capital market over 1985-2016. Hedge funds invest in companies in later stages when compared to traditional venture capitalists and outperform conditional on stage of entry. Hedge funds also invest in venture companies to exploit their stock selection skills: prior industry focus and stock-selection skill (alpha) in public equity markets predicts which industries hedge funds target in the venture market, and prior alpha predicts a higher probability of IPO for their venture targets. Finally, venture experience is valuable for hedge funds since it predicts greater public equity alpha of 1.7% per annum.
  6. "Hedge Fund Liquidity Management: Insights for Fund Performance," with Tolga Ergun and Giulio Girardi.
    • Abstract: Using Form PF filings over 2013–2017, we find that funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets, have shorter-term commitments from investors and creditors, and when market volatility is greater. We also find that funds with low abnormal buffers – that is, with liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks, especially around earnings announcements. Our results highlight potential trade-offs between systemic risk-oriented policies requiring larger liquidity buffers and the impairment of regular price discovery in financial markets.

Journal Articles

  1. "Do Prime Brokers Matter in the Search for Informed Hedge Fund Managers?" with Ji-Woong Chung and Byoung Uk Kang, Accepted at Management Science.
    • Abstract: Using the setting of funds of hedge funds (FoFs), we show that prime brokers (PBs) facilitate investors’ search for informed hedge fund managers. We find that FoFs exhibit PB bias, a disproportionate preference for hedge funds serviced by their connected PBs. This PB bias is stronger when the cost of hedge fund due diligence is higher relative to capital and when the FoF’s management firm generates higher prime brokerage fees. PB bias also predicts FoF performance: the highest PB-bias quartile outperforms the rest by 1.54%–2.77% per annum, after adjusting for differences in their risks.
  2. "Measuring Hedge Fund Liquidity Mismatch," with Tolga Ergun, Giulio Girardi, and Mila Getmansky Sherman 2021, Journal of Alternative Investments, 24, 26-42.
    • Abstract: The authors construct a comprehensive measure of mismatch between the market liquidity of assets and the funding liquidity of liabilities of hedge funds. The measure captures the complete liquidity landscape of hedge funds by encompassing liquidity from both sides of the balance sheet. Using quarterly Form Private Fund (PF) filings, they use portfolio, investor, and financing illiquidity to construct the liquidity mismatch measure and study its dynamics from 2013–2015. They find that the market liquidity of a hedge fund’s assets is typically higher than the funding liquidity of its borrowings and investor capital (negative liquidity mismatch). However, liquidity mismatch tends to be greater (more positive) when VIX is high and among funds with higher leverage, lower managerial stake, and smaller size.
  3. "Investor Protection and Capital Fragility: Evidence From Hedge Funds Around the World," with Vikram Nanda and Haibei Zhao (SSRN) 2021, Review of Financial Studies, 34, 1368--1407.
    • Abstract: We find that capital flows to hedge funds in different countries are influenced by the strength and the enforcement of investor protection laws. Hedge funds located in weak investor protection countries exhibit greater sensitivity of investor outflow to poor performance, relative to funds in countries with strong protection. Furthermore, weak investor protection is associated with fund managers engaging in greater returns management. Our findings suggest that in countries with weaker investor protection, poor fund performance exposes investors to a greater risk of fraud and legal jeopardy, thus triggering a larger outflow of capital.
  4. "Do Properly Anticipated Prices Fluctuate Randomly? Evidence From VIX Futures," with Rajnish Mehra and Sunil Wahal (SSRN) 2020, Journal of Portfolio Management, 46, 144--159.
    • Abstract: The VIX index is not traded on the spot market. Hence, in contrast to other futures markets, the VIX futures contract and spot index are not linked by a no-arbitrage condition. The authors examine (1) whether predictability in the VIX index carries over to the futures market and (2) whether there is independent time-series predictability in VIX futures prices. The answer to both questions is no. Samuelson was right: VIX futures prices properly anticipate predictability in volatility and are themselves unpredictable.
  5. "Liquidity Transformation and Financial Fragility: Evidence from Funds of Hedge Funds," with Vikas Agarwal and Zhen Shi (SSRN) 2019, Journal of Financial and Quantitative Analysis, 54, 2355--2381.
    • Abstract: We examine liquidity transformation by funds of hedge funds (FoFs) by developing a new measure, illiquidity gap, that captures the mismatch between the liquidity of their portfolios and the liquidity available to their investors. We find that higher liquidity transformation is driven by FoFs’ incentives to attract more capital and earn higher compensation. Greater liquidity transformation is associated with higher exposure to investor runs and worse performance during crisis periods. Finally, FoFs mitigate the risks associated with liquidity transformation by maintaining higher cash buffers.
  6. "Who Benefits in a Crisis? Evidence From Hedge Fund Stock and Option Holdings," with J. Spencer Martin and Zhen Shi (SSRN) 2019, Journal of Financial Economics, 131, 345--361.
    • Abstract: We use a unique data set of hedge fund long equity and equity option positions to investigate a significant lockup-related premium earned during the tech bubble (1999–2001) and financial crisis (2007–2009). Net fund flows are significantly greater among lockup funds during crisis and noncrisis periods. Managers of hedge funds with locked-up capital trade opportunistically against flow-motivated trades of non-lockup managers, consistent with a hypothesis of rent extraction in providing crisis era liquidity. The success of this opportunistic trading is concentrated during periods of high borrowing costs, in less liquid stock markets, and is enhanced by hedging in the equity option market.
  7. "The Use of Credit Default Swaps by Bond Mutual Funds: Liquidity Provision and Counterparty Risk," with Lei Li and Jun Qian (SSRN) 2019, Journal of Financial Economics, 131, 168--185.
    • Abstract: Corporate bond mutual funds increased their selling of credit protection in the credit default swaps (CDS) market during the 2007–2008 financial crisis. This trading activity was primarily in multi-name CDS, greater among larger and established funds, and directed toward counterparty dealers in financial distress. Funds that sold credit protection during the crisis experienced greater credit market risk and superior post-crisis performance, consistent with higher expected returns from liquidity provision. Funds using Lehman Brothers as a counterparty experienced abnormal outflows and returns of –2% immediately following Lehman's bankruptcy, suggesting that funds’ opportunistic trading in CDS exposed investors to counterparty risk.
  8. "Strategic Delays and Clustering in Hedge Fund Reported Returns," with Vikram Nanda (SSRN) 2017, Journal of Financial and Quantitative Analysis, 52, 1--35. Lead article.
    • Abstract: We use a novel database to study the timeliness of hedge fund monthly performance disclosures. Managers engage in strategic timing: poor monthly returns are reported with delay, sometimes clustered with stronger subsequent performance, suggestive of “performance smoothing.” We posit that propensity to delay could reveal operational risk and/or poor managerial quality. Consistent with this, a portfolio strategy that buys (sells) funds with historically timely (untimely) reporting delivers 3% annual-style-adjusted returns. Investor flows are lower following reporting delays, although there are potential benefits to managers from delaying reporting when performance is sufficiently poor. We conclude that timely disclosure is an important consideration for hedge fund managers and investors.
  9. "Onshore and Offshore Hedge Funds: Are They Twins?" with Bing Liang and Hyuna Park (SSRN) 2014, Management Science, 60, 74--91.
    • Abstract: Contrary to offshore hedge funds, U.S.-domiciled (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, a limited number of investors, and taxable accounts. We exploit these differences to test predictions about organizational design, investment strategy, capital flows, and fund performance. We find that onshore funds are associated with greater share restrictions, more liquid assets, and a reduced sensitivity of capital flows to superior past performance. We also find some evidence that onshore funds outperform offshore funds, depending on the sample period. The results suggest that a fund's investment and financial policies reflect differences in investor clienteles and the regulatory environment.
  10. "Why Do Hedge Funds Avoid Disclosure? Evidence From Confidential 13F Filings," with Michael Hertzel and Zhen Shi (SSRN) 2014, Journal of Financial and Quantitative Analysis, 48, 1499--1518.
    • Abstract: We study a sample of Form 13F filings where fund advisors seek confidential treatment for some or all of their 13(f)-reportable positions. Consistent with the hypothesis that managers seek confidentiality to protect proprietary information, we find that confidential positions earn positive and signficant abnormal returns over the post-filing confidential period. We also find that managers are more likely to seek confidential treatment of illiquid positions that are more susceptible to front-running. Overall, our analysis highlights important benefits of reduced disclosure that are releveant to the current policy debate on hedge fund transparency.
  11. "A Unique View of Hedge Fund Derivatives Usage: Safeguard or Speculation?" with J. Spencer Martin 2012, Journal of Financial Economics, 105, 436--456.
    • Abstract: We study the common equity and equity option positions of hedge fund investment advisors over the 1999–2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.
  12. "Tournament Behavior in Hedge Funds: High-Water Marks, Fund Liquidation, and Managerial Stake" with Vikram Nanda 2012, Review of Financial Studies, 25, 937--974.
    • Abstract: We analyze whether risk shifting by a hedge fund manager is related to the manager's incentive contract, personal capital stake, and the risk of fund closure. We find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund's high-water mark and when funds face little immediate risk of liquidation. Risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund. Overall, high-water mark provisions, managerial stake, and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting.
  13. "Hedge Funds as Liquidity Providers: Evidence From the Lehman Bankruptcy" with Phil Strahan (SSRN) 2012, Journal of Financial Economics, 103, 570--587.
    • Abstract: Hedge funds using Lehman as prime broker faced a decline in funding liquidity after the September 15, 2008 bankruptcy. We find that stocks held by these Lehman-connected funds experienced greater declines in market liquidity following the bankruptcy than other stocks; the effect was larger for ex ante illiquid stocks and persisted into the beginning of 2009. We find no similar effects surrounding the Bear Stearns failure, suggesting that disruptions surrounding bankruptcy explain the liquidity effects. We conclude that shocks to traders' funding liquidity reduce the market liquidity of the assets that they trade.
  14. "Stock Market Trading Activity and Returns Around Milestones" with Stephan Dieckmann 2011, Journal of Empirical Finance, 18, 570--584.
    • Abstract: We study the relation between daily stock market trading activity and the Dow Jones Industrial Average's (DJIA) movement around millenary milestones—numbers that end in three zeros. We find aggregate turnover to be 5% lower when the DJIA level is less than 1% away from the nearest milestone. The effect emerges as the DJIA approaches a milestone from below, and is stronger for first-time milestones compared to subsequent passages. The aggregate price impact is large, such that daily stock returns show a negative abnormal performance of − 10 basis points. Our findings suggest that millenary milestones of the DJIA play a role in some investors' decision making.
  15. "Share Restrictions and Asset Pricing: Evidence From the Hedge Fund Industry" (SSRN) 2007, Journal of Financial Economics, 83, 33--58.
    • Abstract: This paper presents evidence on the relation between hedge fund returns and restrictions imposed by funds that limit the liquidity of fund investors. The excess returns of funds with lockup restrictions are approximately 4–7% per year higher than those of nonlockup funds. The average alpha of all funds is negative or insignificant after controlling for lockups and other share restrictions. Also, a negative relation is found between share restrictions and the liquidity of the fund's portfolio. This suggests that share restrictions allow funds to efficiently manage illiquid assets, and these benefits are captured by investors as a share illiquidity premium.