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Risk and returns for private equity and venture capital funds

The early success of some well-known private equity and venture capital funds has led to their rapid growth. According to research from Narasimhan Jegadeesh, the Dean’s Distinguished Chair in Finance, Roman Kraussl (U of Luxembourg), and Joshua M. Pollet (U of Illinois), investors should carefully evaluate the future risk and return potential of this asset class and avoid investing primarily because of past successes. Some private equity indices compiled by the industry suggest that these funds offer bigger returns than the public equity market, but prior academic studies offer mixed evidence on performance. Jegadeesh and his coauthors devised a new approach to determine the actual risk and returns by using market prices of funds that primarily invest in unlisted PE and VC funds listed on several European stock exchanges. This approach has a distinct advantage because it uses publicly available market prices rather than self-reported data, which were previously used in other academic studies. Their findings indicate that unlisted PE and VC funds as an asset class are unlikely to yield extraordinary returns as suggested by some self-reported data. They may even yield about the same return as the stock market but are illiquid. Source:

Misreporting in securitized loans

Nonagency mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) derived from MBSs and their role in the recent financial and housing crisis remain a subject of discussion. An MBS is an asset-backed security secured by a mortgage or grouping of mortgages. Non-agency MBSs are not guaranteed by any government-sponsored organization, such as Freddie Mac or Fannie Mae, or the federal government. According to research from Gonzalo Maturana, assistant professor of finance, and John Griffin (U of Texas), the complexity of these structured products made it difficult to learn the true value of the underlying assets. They analyzed “apparent fraud among securitized nonagency loans, looking at unreported second liens, owner occupancy misreporting, and appraisal overstatements.” The study data comes from Lewtan’s ABSNet Loan and HomeVal data sets, along with DataQuick’s Assessor and History files, for the time period between January 2002 and December 2011. The researchers discovered that “48% of loans exhibited at least one indicator of misrepresentation.” The level of misreporting was similar for low- and full-documentation loans. Also, loans with a misreporting were 51% more likely to be delinquent. Maturana and Griffin’s research points to apparent fraud by loan originators and MBS underwriters, and it also suggest that MBS underwriting banks were aware of some of the MBS representations at issuance. Source:

Investor conferences and analyst advantage

In a research paper, T. Clifton Green, associate professor of finance and doctoral area coordinator, and coauthors Russell Jame 10PhD (U of Kentucky), Stanimir Markov (Southern Methodist U), and Musa Subasi (U of Maryland) focused their investigation on broker-hosted investor conferences to determine their impact on investor research. They studied 68,194 presentations by 4,394 companies at 2,749 investor conferences led by 107 brokerages for the period January 2004 to December 2010. According to the data, Green and his coauthors concluded that brokerage research analysts were more likely to provide better research for firms that participated at their conferences. Conference-hosting brokers were more likely to provide “more informative stock recommendations and more accurate earnings forecasts” than non-hosts. They discovered that firms participating in “broker-hosted investor conferences have a closer relation with the hosting analyst than with non-hosts, resulting in more private interactions (e.g., more company visits and meetings with management) and a continual flow of value-relevant information throughout the sample period.” Source:

Increased trading activity and declining returns

Improved trading technologies are changing the markets, facilitating the boom in algorithmic trading and the growth of hedge funds. Liquidity and trading volume continue to hit record levels. In a research study, Tarun Chordia, R. Howard Dobbs Professor of Finance, and coauthors Avanidhar Subrahmanyam (UCLA) and Tong Qing (Singapore Management U) analyzed whether or not increased liquidity and the trading activity of hedge funds has had an impact on financial market anomalies. Anomalies are return patterns that are inconsistent with the basic risk-return paradigm of finance. Increased arbitrage is a possible factor in attenuating the impact of anomalies, including momentum, reversals, accruals, etc. To find the link, Chordia and his coauthors studied proxies for arbitrage trading, including “the impact of the decline in the tick size due to decimalization and the impact of hedge fund assets under management, short interest, and share turnover.” The researchers referenced a wide sampling of equity market anomalies for more than three decades to show that increased liquidity and hedge fund trading activity did ultimately result in the decrease of the “economic and statistical significance of these anomalies.” Source:

Are alternative investments right for the average person?

Given the risk, alternative investments were once considered only appropriate for the affluent and institutional investors. However, investment firms increasingly are offering alternative investment products, including mutual funds, ETFs, and private equity funds with strategies similar to hedge funds, to less affluent people. While average investors are responding eagerly to the move and forking over billions for alternative offerings, there are critics who argue that nontraditional assets are simply too risky for them. In a news article, Klaas Baks, associate professor in the practice of finance and executive director of the Center for Alternative Investment at Goizueta, offered his support of the investment strategy, while George Papadopoulos, a fee-only wealth manager, cautioned against it. Baks noted that alternative vehicles allow less affluent individuals to diversify their portfolios. Alternative investments also require minimal initial investment. Papadopoulos wrote that the risk and fees, as well as a lack of transparency and liquidity, were reasons to avoid nontraditional assets. In the article, Baks contended that all investments offer some risk but that alternative investments, when used correctly, also provide critical access to leverage. Source:

The return on international investment products

Individual investors have access to an ever-increasing number of US-registered equity funds that invest in international assets, as well as institutional investment products focused on global assets. Despite the growing importance of global equity markets for US investors, there is little academic research devoted to their study. Jeffrey Busse, associate professor of finance, Amit Goyal (University of Lausanne), and Sunil Wahal (Arizona State U) advanced the research, tackling the common theory that less developed markets are less efficient and, consequently, “exploitable by active fund managers.” The trio analyzed a large sampling of active retail mutual funds and institutional products investing in global equity markets, concentrating their research on a sample period from 1991 to 2009. The authors used quarterly returns net of trading costs and gross of fees. They also collected information on annual fee schedules, portfolio turnover, and assets under management. On average and in the aggregate, the data showed a lack of “superior performance” for the sampling. The research paper won the Spangler IQAM Best Paper in Investments Prize at the 2014 European Finance Association Annual Meeting in Lugano, Switzerland. Source:

Speculation and its impact on trading volume

Financial researchers have long wondered exactly which economic forces cause variation in asset prices and returns. For instance, traders will often target financial instruments due to their volatile and highly liquid nature, such as US treasury bonds. This speculative behavior takes advantage of the frequent price movements of the product. But the influence of that behavior remains the subject of debate. Francisco Barillas, assistant professor of finance, and Kristoffer Nimark (Cornell U) take a deep dive into the issue by investigating the impact of speculative trading activity on the variation of long maturity US bond yields. For their analysis, Barillas and Nimark use public information to develop a rational model to track “informed traders that take on speculative positions to exploit what they perceive to be inaccurate market expectations about future bond prices.” They argue that their research takes a more “suitable approach for empirical work” by factoring in how traders exploit private information that other traders may not have. The authors note that bond prices alone are not enough information for predicting bond returns. The two write, “If traders have access to different information, this price may differ from what an individual trader would be willing to pay for the bond if he had to hold it until maturity.” Ultimately, they find that this speculation remains a key driver of trading volume, accounting for a “substantial fraction of the variation in historical US bond yields along with the usual analysis of estimating returns based on bond prices.” Source:

Securitized loan modification and loan performance

After the collapse of the housing market, the wave of foreclosures in the US changed the economic landscape of many neighborhoods across the country. Some academics and policymakers have argued that the renegotiation of those loans was a much better alternative than foreclosure and that incentives should have been offered to financial institutions to encourage it. However, little research exists to understand the performance of loans that were modified. Gonzalo Maturana, assistant professor of finance, takes a close look at loan modifications made early in the recent housing crisis to better understand the value of offering incentives to modify securitized non-agency loans. According to Maturana, researchers contend that the small number of loan modifications added to the number of foreclosures during the subprime crisis. His analysis consisted of slightly more than 835,000 non-agency securitized loans that became delinquent between August 2007 and February 2009. Maturana found that loan “modification reduces loan losses by 35.8% relative to the average loss, which suggests that the marginal benefit of modification likely exceeded the marginal cost.” Additionally, modifications resulted in fewer liquidations. He also found that modifications were particularly useful “in preventing future loan losses in times of large increases in delinquencies when servicers are more likely to be working at full capacity.” Source:

Controversy surrounding the VIX benchmark — this expert saw it coming

There are a lot of eyes on the VIX benchmark these days as regulators explore potential flaws in the Cboe Global Markets product. Focus is on the monthly process through which the price of VIX futures contracts is calculated. According to a recent article on Bloomberg, “That monthly auction has been the focus of intense scrutiny this year, spurred by wild price swings and a 2017 research paper alleging the process is rigged. The stakes are big. Billions of dollars of derivatives contracts and exchange-traded products are tied to the index.” But should this be a surprise to anyone? As the article points out, a Texas McCombs professor has been looking into the VIP benchmark for some time now: “John Griffin, the University of Texas professor whose 2017 paper written with a grad student caught traders’ attention, believes someone is artificially suppressing the price of S&P 500 contracts, then profiting when the VIX settlement price comes in much higher. A more than $200 million distortion in the market was seen during the April 18 auction, he argues. ‘Since the public release and publication of our academic paper last year, the settlement deviations have substantially increased,’ he wrote in this week’s column. [Griffin is a regular columnist for Bloomberg.] ‘We are concerned that market participants may be reading our paper as a how-to-manipulate manual.’” This is a complex issue with literally billions of dollars at stake. And if you need to know more, that’s where our experts can help. Griffin is an educator and researcher in the structured finance field with respect to mortgage-backed securities and collateralized debt obligations. His expertise also includes international finance, institutional investment, and forensic finance, and his recent research focuses on understanding the role that conflicts of interest and misreporting by credit rating agencies and investment banks played in the financial crisis.Griffin is available to speak with media. Simply click on his icon to arrange an interview today. Source:

Just how many glass ceilings do women need to shatter in America?

These days, women are finally making their mark in elected houses and legislatures around the country. It’s seen as a serious advancement since the days of old white men in differing grey suits as the only variety on a ballot. A recent article in Yahoo news quoted University of Mary Washington’s Rosalyn Cooperman observations about how far women have come, but also how much further there is to go. “The attention has been on the record numbers who are running and to the message being sent by those sheer numbers,” says Rosalyn Cooperman, associate professor of political science at the University of Mary Washington in Fredericksburg, Va. “But what kind of change this brings depends not only on who runs and who wins, but how they navigate the rigid political institutions” they are being elected to. But now that women are inching closer to equal on the ballot – it’s once they achieve electoral victory that a whole other gender gap reveals itself. Cooperman recently observed the Virginia House of Delegates where 12 were women were elected to the first time. “More than half of the incoming freshmen were relegated to the science and technology committee, a committee with a light workload and limited jurisdiction,” Cooperman wrote in an article for the website Gender Watch 2018. “The lone Republican woman freshman was assigned to House finance. “Democratic women (and men) delegates,” she continued, “also saw most of their sponsored bills killed in Republican-dominated committees.” For instance, Danica Roem, who broke barriers by being the first transgender candidate delegate in the assembly, saw all 11 of her proposed bills die before leaving committee or even subcommittee. Of all the bills filed by the 16 freshman Democrats, 85 percent never made it to a floor vote. So, is this just a matter of newcomers that need to learn the fine art of politics and horse-trading or is there a deeper issue? Is politics still a ‘man’s game’ and if so what will it take to change it? That’s where our experts can help. Dr. Rosalyn Cooperman's expertise focuses on women in politics. She is available to speak with media regarding this issue in America. Simply click on Rosalyn’s icon to arrange an interview. Source: