This thesis is made up of three independent chapters on hedge fund investment
and portfolio management. This thesis aims to shed light on the investment skills
of hedge fund managers in the U.S. stock market and convertible bond market,
and the funding liquidity risk of hedge funds.
Chapter 2 investigates the preference and investment skills of Equity Long/Short
and Equity Market Neutral hedge fund managers in the U.S. equity market from
March 1997 to December 2012. Numerical results show that equity fund managers
on average prefer stocks with smaller size, higher book-to-market, one-month
momentum and twelve-month reversal. This chapter shows that the aggregate
holdings and trading of equity hedge funds predict stock returns. Besides, we
find that equity hedge fund managers have superior stock picking ability, but no
superior market timing ability.
Chapter 3 studies the impact of hedge fund trading that are induced by funding
liquidity shocks on stock prices. In this chapter, we show that shocks to aggregate
funding liquidity lead to massive selloffs of hedge funds with fewer share restrictions and higher leverage. Besides, the selloffs of financially constrained hedge
funds create price pressure in the stock market during liquidity shock periods. In
sum, this chapter provides supportive evidence for the liquidity spiral model in
Brunnermeier and Pedersen (2009).
Chapter 4 provides an innovative analysis of the risk and returns of convertible
bond arbitrage hedge funds. Consistent with previous research, this chapter
reveals that a long-only convertible bond portfolio, together with a long-short
convertible bond portfolio, explains the majority of convertible arbitrage hedge
fund index returns. Besides, with 13F hedge fund holdings of convertible bonds,
we improve the Sharpe Ratio of the long-short convertible arbitrage strategy and
the explanatory power of the convertible arbitrage benchmark model.