Finance 453 Global Asset Allocation and Stock Selection

Finance 453: Global Asset Allocation and Stock Selection Global Asset Allocation: Fund Age and Hedge Fund Returns Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA Cam. harvey@duke. edu +1 919. 660. 7768 office || +1 919. 271. 8156 mobile http: //www. duke. edu/~charvey 1

Fund Age and Hedge Fund Returns Do younger funds outperform older funds? Popular Press • The Financial Times recently wrote about a Per. Trac study* claims that funds less than 2 years old greatly outperform funds that are more than 2 years old • However, there are reasons to be sceptical of such evidence. • Per. Trac study does not control for other important (and obvious) factors. As such, the results could be spurious. • What is the evidence is a scientific analysis of age and return? *May 19, 2008, http: //www. pertrac. com/per 0020/web/me. get? websections. show&PER 0020_1278 2

Fund Age and Hedge Fund Returns Do younger funds outperform older funds? Conducting a scientific study • Survivorship. Per. Trac study admits that younger fund sample suffers from greater survivorship problem. This would bias the results in favour of finding a higher return in young funds. • Host of other factors* such as: – Previous year’s incentives – Discretion (lock up, notice, redemption periods) – Past performance – Past volatility (controlling for risk) – Management fees – Fund strategy (want apples to apples comparison) • Per. Trac study does not control for any of these factors *This list of control variables is meant to be illustrative rather than comprehensive. 3

Fund Age and Hedge Fund Returns Do younger funds outperform older funds? New financial research • “Role of managerial incentives and discretion in hedge fund performance, ” 2007 working paper, by Vikas Agarwal (Georgia State University), Naveen D. Daniel (Drexel University) and Narayan Naik (London Business School). * • Study is in advanced stages of peer review at the Journal of Finance (the top scientific journal in the field of finance) • None of the authors are affiliated with GLG Partners • In contrast to the Per. Trac study, this research – Uses a much more comprehensive sample of funds: the union of HFR, TASS, MSCI and CISDM databases – Conducts analysis of returns and age controlling for other factors *http: //papers. ssrn. com/sol 3/papers. cfm? abstract_id=889008 4

Fund Age and Hedge Fund Returns Do younger funds outperform older funds? New financial research: Findings • Per. Trac study claims a 551 bp per annum difference between the youngest and oldest fund returns • Journal of Finance paper shows a statistically insignificant and economically small difference of 20 -40 bp • Conclusion of the research paper is that there is no scientific evidence linking fund age to diminished performance • In addition, even with the Journal of Finance study, survivorship could be an issue which could account for the 20 -40 bp difference. 5