Management
Strategies
*NEW*
Systemic
risk and hedge funds, by Nicholas Chan, Mila Getmansky, Shane Haas, and Andrew
Lo, prepared for a recent National Bureau conference on the risks of financial
institutions. This is a scary article. Hedge funds are becoming an
important threat of systemic risk in the system. Given the tremendous growth
of the hedge fund sector, the likelihood of a higher attrition rate due to
partners wishing to liquidate their shares, the links to the banking system,
“the risks facing hedge funds are nonlinear and more complex than those facing
traditional asset classes... [S]ystemic risk is increasing.”
The Winter
2004 issue of The Journal of Portfolio Management contains three
articles of high interest for managing alpha, for understanding the
operational distinctions between alpha and beta, and for controlling risk
within these functions. The articles are: “Strategic versus tactical asset
allocation,” by Mark Anson; “Improving portfolio efficiency,” by Kurt
Winkelman, and “Multiple alpha sources and active management,” by Eric
Sorensen, Edward Qian, Robert Schoen, and Ronald Hua.
Taxation
and corporate payout policy, by James Poterba, Working paper #10321, National
Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138,
February 2004. This interesting paper is short but sweet. After
studying tax rates and dividends all the way back to 1929, Poterba concludes
that recent legislation should raise the after-tax value of dividends relative
to capital gains by a significant amount. The estimates “imply that the
recent tax reform could ultimately increase dividends by almost twenty
percent.”
The
hierarchy of investment choice, by Mark Kritzman and Sebastien Page, Journal
of Porftolio Management, Summer 2003. Which decision is most
important — asset allocation, country allocation, sector, or selection of
individual securities. The answer is in the opposite direction from what you
have always thought and read over and over. Because investors, for a variety
of reasons, tend to hug some benchmark, they fail to take advantage of
opportunities where the dispersion of returns is the greatest. This article is
one of the most important ever to appear in the The Journal of Portfolio
Management.
An
analysis of the effect of management participation in director selection on
the long-term performance of the firm, by William Callahan, James Millar,
and Craig Schulman, Journal of Corporate Finance, March 2003.
Although there are some arguments going around that management representation
on boards leads to sub-optimal results, this careful statistical study of 882
companies in the Fortune 1000 lists shows that large numbers of outside
directors and the existence of a nominating committee is associated with
negative influences on company performance. Removing management from
participation in the board of directors can be harmful to companies’ market
performance.
“Dividends,
share repurchases, and the substitution
hypothesis,” by Gustavo Grullon and Roni Michaely, The Journal
of Finance, August 2002, is an illuminating and carefully- researched
study of this controversial matter. The authors present a wealth of
evidence supporting the hypothesis that repurchases have been a growing
substitute for dividend payments as a mean of distributing cash to
shareholders, especially since 1983. Warning: the data in this study
end in 1997. Since that time, the volume of repurchases and the volume
of new options issued to executives have been more closely correlated.
On this matter, see a paper in The Journal of Financial Economics by
Kathy Kahle, “When a Buyback isn’t a buyback: Open market
operations and employee options.” Kahle’s research confirms
an increasing relationship between share buybacks and exerciseable
options in recent years. As she puts it, the efforts by managements
to make tax-efficient cash distributions to shareholders fail to explain
the surge in buybacks during the 1990s.
