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Mispricing chasing and hedge fund returns

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posted on 2022-06-23, 08:45 authored by Tianyi Ma, Baibing LiBaibing Li, Kai-Hong TeeKai-Hong Tee
Various anomalies identified in the literature provide investors with enormous opportunities to chase mispriced stocks. This paper investigates hedge funds’ mispricing-chasing behaviors. We use two mispricing factors in the literature, namely Anomaly-Long and Anomaly-Short, to develop a mispricing-chasing model, through which we examine the evidence of mispricing-chasing behaviors among equity-oriented hedge funds. We find that, faced with different types of mispricing opportunity, hedge funds exploit mispricing opportunities differently, either by capturing the underlying market exposure or reaping profits via short selling. Extending the fund classification model in the literature, we classify funds into different skill groups. We find approximately one-third of the equity-oriented hedge funds are classified as excellent/good mispricing chasers. Furthermore, we evaluate the underlying determinants for funds’ grouping and find that excellent/good mispricing chasers tend to be of smaller size, to charge a higher actual annual fee, and to have been established for a shorter time. This finding not only serves as an important reference for investors when selecting profitable hedge funds, but also provides important information helping hedge funds to stay competitive in the industry.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of Empirical Finance

Volume

68

Pages

34 - 49

Publisher

Elsevier

Version

  • AM (Accepted Manuscript)

Rights holder

© Elsevier B.V.

Publisher statement

This paper was accepted for publication in the Journal of Empirical Finance and the definitive published version is available at https://doi.org/10.1016/j.jempfin.2022.05.002

Acceptance date

2022-05-26

Publication date

2022-05-30

Copyright date

2022

ISSN

0927-5398

Language

  • en

Depositor

Prof Baibing Li. Deposit date: 20 June 2022

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