The Most Wonderful Time of Year for Hedge Funds
The holiday season is an especially cheery time for hedge funds. According to a recent study, their returns spike significantly in December, raising the overall performance and the fees managers ultimately pocket.
Researchers at Georgia State, London Business School, and Purdue analyzed the returns of thousands of hedge funds worldwide. They found that returns, before fees, averaged 2.5% in December, compared with 0.9% in other months.
Fund managers may boost their numbers in part, the authors contend, by holding back returns from previous months and booking them in December instead. Last-minute stock purchases in the final days of the month can also juice up a portfolio's performance; managers buy additional shares of companies they already own, which can raise demand and the price.
There's plenty of incentive to do so. The funds get more fees, and many managers get a bonus for beating the annual performance of certain targets such as peers or markets indexes. Says one of the study's authors, Narayan Naik, a professor of finance at LBS: "If managers exceed yearly expectations, they get paid more."
A Second Look at Payday Loans
Payday lenders get a bad rap for charging exorbitant rates on short-term loans. But according to Donald Morgan at the Federal Reserve Bank of New York, they may be better lifelines for cash-strapped consumers than other options.
He studied households in Georgia and North Carolina, states that banned payday lenders in 2004 and 2005, respectively. Since then, consumers in those states are bouncing more checks, lodging more complaints about debt collectors, and filing for bankruptcy more frequently. In Atlanta the Federal Reserve reported an additional 1.2 million bounced checks.
Payday advances may not be ideal, the author argues, but the alternatives are worse. Without that option, consumers may be resorting to banks' overdraft protection or loans from pawnshops, which usually charge higher interest. Or even worse, they just don't pay their bills.
How Much Is That CDO Worth?
It's tricky to figure out what subprime-linked securities may be worth. Valuation usually involves digging through esoteric financial contracts by hand. Moody's (MCO) has a way to automate the process.
New software from the rating agency spits out projected cash flows from collateralized debt obligations, allowing investors to put a price on them more quickly. The program, which uses multiple databases, looks at collateral, the various pieces of the CDOs, and different credit environments. Valuation is dependent on investors' assumptions, so it's not an exact science. Still, automating part of the process could be useful given that CDOs are like snowflakes—no two are exactly alike.
This service and another one from Intex Solutions could be important tools for bringing sound judgment to today's turmoil. Panicked investors keep trying to sell, but bottom fishers hold back when there's uncertainty about the value of a security. Markets remain unsettled until there's more confidence, a feeling few CDO investors have right now.