Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn
|Authors:||Ilia Dichev and Gwen Yu|
|Publication:||Journal of Financial Economics (forthcoming)|
The returns of hedge fund investors depend not only on the returns of the hedge funds they hold but also on the timing and magnitude of their capital flows in and out of the funds. We use dollar-weighted returns (a form of IRR) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the S&P 500 index and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.
Innovations in Governance
|Authors:||Raymond Fisman and Eric Werker|
|Publication:||In Innovation Policy and the Economy. Vol. 11, edited by Josh Lerner and Scott Stern. NBER Book Series. University of Chicago Press, forthcoming|
In this paper we explore the innovations in governance that have promoted investment and growth. Some policymakers have tinkered with their country's institutions, some have undertaken wholesale changes, while others have attempted to influence the rules in other countries. We survey past attempts at governance innovation, from private governance in India's industrial cities to cross-border government efforts, like Singapore's Suzhou Park, outside of Shanghai, from norm-changing mimes in Bogota to rule-of-law enforcing anti-corruption authorities in Hong Kong. From these recent experiences, we try to extract a few key principles that characterize governance innovations that encourage investment and growth. These include competition, which puts pressure on policymakers to improve institutions; information, which provides necessary knowledge to citizens that can help them push for improved governance; trade in institutions, which allows effective institutions to move across borders; and shifting culture, that is, the jolting of norms to be rule compliant. Finally, we use these principles combined with historical precedent to describe the potential consequences of some recent proposals for governance innovation.
Download the paper: http://www.nber.org/chapters/c12045.pdf
Reversing the Extraverted Leadership Advantage: The Role of Employee Proactivity
|Authors:||A. M. Grant, F. Gino, and D. Hofmann|
|Publication:||Academy of Management Journal (forthcoming)|
Extraversion predicts leadership emergence and effectiveness, but do groups perform more effectively under extraverted leadership? Drawing on dominance complementarity theory, we propose that although extraverted leadership enhances group performance when employees are passive, this effect reverses when employees are proactive, because extraverted leaders are less receptive to proactivity. In Study 1, pizza stores with leaders high (low) in extraversion achieved higher profits when employees were passive (proactive). Study 2 constructively replicates these findings in the laboratory: passive (proactive) groups achieved higher performance when leaders acted high (low) in extraversion. We discuss theoretical and practical implications for leadership and proactivity.
Financing Risk and Bubbles of Innovation
|Authors:||Ramana Nanda and Matthew Rhodes-Kropf|
: Investors in risky startups who stage their investments face financing risk-that is, the risk that later—stage investors will not fund the startup, even if the fundamentals of the firm are still sound. We show that financing risk is part of a rational equilibrium where investors can flip from investing to not investing in certain sectors of the economy. We further demonstrate that financing risk has the greatest impact on firms with the most real option value. Hence, the mix of projects funded and type of investors who are active varies with the level of financing risk in the economy. We also highlight that some extremely novel technologies may in fact need "hot" financial markets to get through the initial period of diffusion. Our work underscores that financial markets may play a much larger and under-studied role in creating and magnifying bubbles of innovation in the real economy.
Download the paper: http://www.hbs.edu/research/pdf/11-013.pdf
A Reexamination of Tunneling and Business Groups: New Data and New Methods
|Authors:||Jordan Siegel and Prithwiraj Choudhury|
The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies. We propose that firms' corporate governance and firms' strategic business activities within an industry are interlinked. By conducting a simultaneous economic analysis of business strategy and corporate governance, scholars can better discern the quality of a firm's governance. We look at one of the most rigorous extant methodologies for detecting "tunneling," or efforts by firms' controlling owner managers to take money for themselves at the expense of minority shareholders. We find that, in contrast to prior views, Indian business groups are not, on average, engaging in tunneling (expropriation) but are, on average, exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Moreover, unlike many past conceptions of business groups from financial economics, sociology, and strategy, we find evidence for a knowledge-based "recombinative capabilities" view of business groups-that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value. Further, our finding that Indian business groups have grown larger and more diversified since liberalization and since broad-based corporate governance reforms were implemented goes expressly against the prediction of prior schools of thought about business groups. We argue that the conventional wisdom about tunneling and business groups will need to be questioned and reformulated in light of the new data, methodology, and findings presented in this study.
Download the paper: http://www.hbs.edu/research/pdf/10-072.pdf
Cases & Course Materials
A Note on Corporate Entrepreneurship: Challenge or Opportunity?
Harvard Business School Note 810-145
This note provides an overview of the rationale and the challenges associated with building new businesses within established companies. It provides a framework for understanding why corporations pursue entrepreneurial ventures and the various levers that they employ. The note offers a comparison of the various approaches, with examples, and their pros and cons.
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One Firm One Future at Davis Langdon (A)
Robert G. Eccles and Kaitlyn A. Simpson
Harvard Business School Case 411-006
Senior Partner Rob Smith just led construction consultancy firm Davis Langdon through a major organizational change in Europe and the Middle East. In the past, compensation arrangements had not incentivized partners to collaborate across the firm to serve clients' increasingly global and complex needs. In 2007, under Smith's leadership, the partnership agreed to implement holistic change. This included a shift from geographical to sector structure and a new profit-sharing system that encouraged partners to work together for the benefit of the firm as a whole. Amidst the global economic crisis, Smith must decide how to extend on a global basis the alignment the firm has begun to achieve in Europe and the Middle East.
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Fidelity Retires in Canada
Robert C. Pozen and Edward Scott
Harvard Business School Case 311-023
The head of Fidelity Canada was faced with a decision about what to do with its retirement business there. Although Fidelity as a fund manager has made some headway in Canada, the competition has been very tough for the administration of retirement plans—a separate business from fund management. The case discusses the similarities and differences between defined contribution plans in Canada and the United States. It then focuses on three possible decisions for Fidelity Canada—grow its own retirement business, find a joint venture partner, or sell the business.
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Delta Electronics Hybrid Power Train
Willy Shih and Jyun-Cheng Wang
Harvard Business School Case 610-098
Delta Electronics, the world's largest manufacturer of switching power supplies, hoped to enter the market for gasoline-electric hybrid power trains for automobiles by being a major component and subsystem supplier. While most public awareness of hybrid vehicles fell to the tier one integrated vehicle manufacturers, Delta felt it had an opportunity to enter the market via new automotive market entrants in China that had comparatively fewer capabilities and were willing to purchase major subsystems. Yet the company faced a dilemma—a major customer wanted Delta to transfer ownership of key intellectual property as a condition of doing business. The case affords students an opportunity to consider whether a technological shift will enable what seems traditionally to be a highly integrated product.
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