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Hedge Fund
Scholarly Compositions - Featured Authors
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Dr. Franklin Edwards
Arthur
F. Burns Professor of Free and Competitive Enterprise
Columbia University, Graduate School
of Business
Academic Home Page
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Curriculum Vitae
Brief Biography:
Franklin R. Edwards
is a professor of finance and economics at the Graduate School of
Business at Columbia University and holds the Arthur F. Burns Chair
in Free and Competitive Enterprise at Columbia. He holds a PhD in
Economics from Harvard University and a JD from New York University
Law School. His areas of expertise include hedge funds, corporate
governance, financial markets and regulation, and derivatives
markets. Professor Edwards teaches MBA courses related to corporate
governance, hedge funds, and financial markets and institutions. He
is the author of the 1996 book “The New Finance: Regulation and
Financial Stability ” and a 1992 textbook “Futures and Options.” In
addition, he has authored more than a hundred professional articles
dealing with financial
institutions, hedge funds, corporate governance, derivatives
markets, energy markets, and financial regulation.
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Professor
Edwards’ recent work on hedge funds and investment
management includes the articles “Hedge Funds: What Do We
Know?” “Hedge Fund Performance and Manager Skill,” and “The
Regulation of Hedge Funds: Financial Stability and Investor
Protection” His recent work on corporate governance includes
“U.S. Corporate Governance and Enron: What Went Wrong and
Can It Be Fixed?” In “Hedge Funds and the Collapse of
Long-Term Capital Management” Professor Edwards explores the
relationship between systemic risk in financial markets and
the regulation of hedge funds. This work is extended in
recent co-authored papers focusing the implications of the
special treatment that derivatives receive under the
bankruptcy code, such “Derivatives and the Bankruptcy Code:
Why the Special Treatment?”
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Derivatives and the Bankruptcy Code: Why the Special Treatment?
by Franklin
R. Edwards & Edward R. Morrison
Columbia University
August 16, 2004
Abstract
The collapse of Long Term Capital Management (LTCM) in Fall 1998
and the Federal Reserve Bank's subsequent efforts to orchestrate
a bailout raise important questions about the structure of the
Bankruptcy Code. The Code contains numerous provisions affording
special treatment to financial derivatives contracts, the most
important of which exempts these contracts from the "automatic
stay" and permits counterparties to terminate derivatives
contracts with a debtor in bankruptcy and seize underlying
collateral. No other counterparty or creditor of the debtor has
such freedom; to the contrary, the automatic stay prohibits them
from undertaking any act that threatens the debtor's assets. It
is commonly believed that the exemption for derivatives
contracts helps reduce "systemic risk" in financial markets,
that is, the risk that multiple major financial market
participants will fail at the same time and, as a result,
drastically reduce market liquidity. Indeed, Congress is now
contemplating reforms that would extend the exemption to include
a broader array of financial contracts, all in the name of
reducing systemic risk. This is a mistake. The Bankruptcy Code
can do little to reduce systemic risk and may in fact exacerbate
it, as the experience of LTCM suggests. Risk of a systemic
meltdown arose there and prompted intervention by the Fed
precisely because derivatives contracts were exempt from the
automatic stay. Derivatives contracts may merit special
treatment, but fear of systemic risk is a red herring.
A better, efficiency-based reason for treating derivatives
contracts differently arises naturally from the economic theory
underlying the automatic stay. The stay protects assets to the
extent they are needed to preserve a firm's going-concern
surplus (its value above and beyond the sale value of its
assets). Assets are needed to preserve going-concern surplus
only if they are firm-specific, that is, only if they are worth
more inside the firm than outside it. This is often true for
plant and equipment. It is never true for derivatives contracts.
This observation helps rationalize the Code's treatment of
derivatives contracts and other features of the automatic stay.
There are, however, downsides to treating derivatives contracts
differently (creditors, for example, would like to disguise
loans as derivatives contracts). These downsides are probably
not significant, but they highlight the fragility of the Code's
treatment of derivatives contracts, which should worry members
of Congress as they consider arguments to expand the Code's
exemptions for derivatives contracts.
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Hedge Fund
Performance and Manager Skill
by Franklin
R. Edwards & Mustafa O. Caglayan
Columbia University & J.P. Morgan Chase Securities, N.Y.
May 8, 2001
Abstract
Using data on the monthly returns of hedge funds during the
period 1990:01 through 1998:08, we estimate six-factor Jensen
alphas for individual hedge funds employing eight different
investment styles. We find that about 25 percent of hedge funds
earn positive excess returns, and that the frequency and
magnitude of funds' excess returns differ markedly by investment
style. Using six-factor alphas as a measure of performance, we
also analyze performance persistence over one- and two-year
horizons and find evidence of significant persistence among both
winners and losers. These findings together with our finding
that hedge funds that pay managers higher incentive fees also
have higher excess returns are consistent with the view that
fund manager skill may be a partial explanation for the positive
excess returns earned by hedge funds.
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Hedge Funds and Commodity Fund Investments in Bull and Bear
Markets
by Franklin
R. Edwards & Mustafa O. Caglayan
Columbia University & J.P. Morgan Chase Securities, N.Y.
May 2001
Abstract
This study examines the performance of sixteen different hedge
fund and commodity fund investment styles during rising and
falling stock prices over the period 1990:01 through 1998:08.
Since a primary motivation for investing in hedge funds and
commodity funds is to diversify against falling stock prices, it
is important to examine the performance of these funds during
bear stock markets. The study evaluates hedge funds and
commodity funds both as stand-alone assets and as portfolio
assets, and in both bull and bear stock markets. In addition, it
utilizes the Sharpe ratio as well as alternative safety-first
performance criteria to evaluate the funds. We conclude that
commodity funds generally provide greater downside protection
than do hedge funds. Commodity funds have higher returns in bear
markets than do hedge funds, and generally have an inverse
correlation with stock returns in bear markets, while hedge
funds typically exhibit a higher positive correlation with stock
returns in bear markets than in bull markets. However, three
hedge fund styles - market-neutral, event-driven, and global
macro - provide fairly good downside protection while still
providing more attractive returns over all markets than do
commodity funds.
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Hedge
Funds and Managed Futures As Asset Classes
by Franklin
R. Edwards & Jimmy Liew
Columbia University
September 14, 1998
Abstract
This
study examines the performance of hedge funds and managed
futures as alternative asset classes from 1982 through 1996. It
concludes that an investment in a portfolio of either hedge
funds or managed futures makes both an attractive stand-alone
investment and a performance-enhancing portfolio asset.
Including these investments in diversified stock and bond
portfolios typically increases the Sharpe ratios of those
portfolios by 22.7 to 45.4 percent. Hedge funds and managed
futures are complementary asset classes: both enhance portfolio
performance but for different reasons. In addition, as asset
classes, managed futures and hedge funds have earned positive
risk-adjusted returns. Finally, an analysis of performance
persistence suggests that some hedge fund managers possess
superior skill.
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Mutual Funds and Stock and Bond Market Stability
by Franklin
R. Edwards & Xin Zhang
Columbia University
December 18, 1997
Abstract
The past decade's bull market in U.S. stock market and the
experience in recent Asian financial crisis raised interesting
questions on the impact of institutional investors (mutual
funds, pension funds and hedge funds) on financial markets.
Mutual funds in US have experienced unprecedented growth in
recent years. Many believe that the U.S. equity bull market of
the 1990's is attributable to the huge flows of funds into
equity mutual funds during this period, and that a withdrawal of
those funds could send stock prices plummeting. This article
investigates the relationship between aggregate monthly mutual
fund flows (sales, redemptions, and net sales) and stock and
bond monthly returns during a 30-year period beginning January
l961, utilizing both Granger causality and instrumental
variables analysis. We also tests a variety of financial
theories that may explain how mutual funds may affect financial
markets.
The main findings are as follows. First, on whether flows cause
return, with one exception, flows into stock and bond funds have
not affected either stock and bond returns. The exception is
1971-81, when widespread redemptions from equity mutual funds
significantly depressed stock returns. On the other hand, on
whether returns cause flows, the magnitude of flows into both
stock and bond funds are significantly affected by stock and
bond returns.
These findings suggest, first, that the recent run-up in stock
prices cannot be attributed to the rapid growth of equity mutual
funds during the 1980's and 1997's; and, second, that the
possibility of a mutual-fund-induced downward price spiral in
stock prices cannot be ruled out. The results for the 1971-81
period suggest that in a "down" stock market, when stock returns
are low and mutual fund redemptions are high, outflows of funds
from mutual funds could put downward pressure on stock prices.
This is consistent with a noise-trader view of markets. It
should be recognized, however, that current mutual fund
investors are different from those during 1971-81. Today, more
than half of stock and bond mutual fund assets owned by
households are held in some type of retirement plan. Thus,
current mutual fund investors may have different investment
objectives and longer investment horizons than those in 1971-81,
and may behave differently in a market downturn.
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| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
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