Dissertation sheds light on hedge fund activities
25.04.2012
Hedge funds have always been considered mysterious and in public dialogue their activities occasionally take on nearly mythical proportions. M. Sc. (Econ.) Petri Jylhä's doctoral dissertation sheds light on hedge fund activities and shows that these funds have both positive and negative impacts on investors and financing markets.
The dissertation comprises four different essays that examine hedge fund activities from different perspectives.
The first essay addresses hedge fund activities in international financing markets. Based on the results, funds generally engage in traditional interest rate differential trading, which involves borrowing funds in low-interest currencies and investing in high-interest currencies. The funds have grown so large that their trades on the currency markets affect currency rates and interest rates. Such was the case in autumn 2008, when capital drain from hedge funds strengthened the Japanese yen and weakened many high-interest currencies.
Capital flows have a significant impact on fund yields
The second essay demonstrates that hedge funds provide liquidity on the stock market. The results show that funds buy stocks that other investors want to sell and sell stocks that others want to purchase. Thus, hedge funds improve market liquidity and reduce fluctuations in share prices.
The third essay shows that capital flows have a significant impact on hedge fund yields. When investors invest capital in funds, the existing investments grow, which in turn increases the value of the investments in the fund. It took nearly two years for this effect to dissipate. Thus, part of short-term hedge fund yields are caused by capital flows.
Hedge funds misreport returns for their own benefit
The fourth essay examines hedge fund return reporting and the accuracy of such reporting. According to the results, some hedge funds misreport return figures at times in order to advance their own cause. Misreporting can artificially increase the size of a fund and allow for invoicing of higher commissions, revise return history to make it more attractive for new investors, and sell overpriced fund shares to new investors or buy out investors at prices below the actual value.
Misreporting of returns is most likely to occur when it is most beneficial to the fund. Artificial manipulation of returns reduces the estimates of fund risk and increase estimates of returns adjusted for risk. This may be the very reason why investors favour funds that misreport in comparison to those that report honestly.
Public examination of the doctoral dissertation
M. Sc. (Econ.) Petri Jylhä’s doctoral dissertation Esseitä hedge-rahastojen taloustieteestä (Essays on the Economics of Hedge Funds) in the subject area of financing will be examined at Aalto University School of Economics (Chydenia, Stora Enso Hall, 3rd floor, Runeberginkatu 22-24) at noon on 4 May 2012.
Professor Joshua Pollet (Michigan State University) will act as the opponent and Professor Matti Suominen as the custos.
Media representatives may request free copies from the School of Economics Communications Unit, viestinta-econ(at)aalto.fi or tel. +358 50 566 5673. The dissertation can be ordered by email from: toolo(at)ayy.fi.
Further information: Petri Jylhä (petri.jylha(at)aalto.fi), tel. +358 40 353 8034.
