Practical analysis for investment professionals
13 November 2014

A Cycle of Flows, Price Pressure, and Hedge Fund Returns (Podcast)

The enormous growth in hedge fund assets began in the late 1990s and has continued up to the present. At the same time, academic research has focused on the flow-driven price impacts on financial assets but has not focused on burgeoning hedge fund assets. Katja Ahoniemi and coauthor Petri Jylhä seek to correct that oversight with their recent Financial Analysts Journal article, “Flows, Price Pressure, and Hedge Fund Returns,” published in the September/October 2014 issue.

We got the chance to speak with Ahoniemi about the implications of her research.



In their research, Ahoniemi and Jylhä explored how capital flows affect hedge fund returns. They found that funds with high inflows outperform funds with high outflows during the month of the flows, which generates a cycle: Flows exert price pressure, which induces more flows, and these flows trigger further price pressure.

Importantly, their research has clear and practical implications for evaluating the performance of hedge funds. “There is a lot of attention paid to the skill of hedge fund managers,” Ahoniemi said. “And when analysts look at hedge funds . . . they may be interested in the risk exposures of a fund, the pure skill of a manager, but actually, we’re saying that flows could also be an additional driver to performance.”

Furthermore, managerial compensation can be affected by the cycle the authors discovered. “On a very practical level, if managerial compensation of hedge fund managers is tied to fund performance, as it normally is, then there could potentially be implications from these results [to the effect] that flows are affecting the returns in the short term,” Ahoniemi said. “And as our results indicate, these flow impacts on returns take a very long time to revert.”

To learn more about the results of this research, listen to the interview above or download the MP3.

CFA Institute members can read the full article on the Publications website.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

1 thought on “A Cycle of Flows, Price Pressure, and Hedge Fund Returns (Podcast)”

  1. Brad Case, PhD, CFA, CAIA says:

    This is important, and it fits with other research showing that hedge funds haven’t performed well, net of costs, over long observation periods. CEM Benchmarking just published a study sponsored by NAREIT of actual performance realized by more than 300 U.S. DB pension plans over the 14-year period 1988-2011 (http://www.reit.com/sites/default/files/pdf/Asset%20Allocation%20and%20Fund%20Performance%20Merged%20With%20Title%20Page%20(12May2014).pdf).
    The study showed that hedge funds have been the WORST asset class with gross returns averaging just 6.02% per year (lower than every other asset class except “U.S. other fixed income”) but with investment costs averaging 125.1 basis points per year (higher than every other asset class except private equity). Net returns were dead last at 4.77% per year. Hedge funds were worse than all four categories of fixed income–meaning that pension funds could have diversified their equity allocations much more effectively while paying between one-third and one-seventh as much!
    CEM Benchmarking estimated that the average pension fund would have IMPROVED its average returns by 2.1 bps/yr if it had REDUCED its hedge fund allocation by one percentage point, yet average allocations to hedge funds increased by 5.0 percentage points over the historical period.
    Clearly the problem analyzed by this paper is an enormous one: institutional investors have piled into hedge funds, chasing past returns, and have paid hedge fund managers enormous piles of cash for what turns out to have been dismal “performance.” We’ve got to put a stop to this.

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