Essays in Empirical Finance

Abstract

This thesis consists of three stand-alone essays in the funds management literature. The first essay examines the rationales for investing in closed-end funds (CEFs). Recent theory argues CEF serves as an ideal investment vehicle for investors who seek to gain exposure to illiquid securities and yet wish to avoid the high cost of transactions attached to such securities. Consistent with the predictions, this study finds CEF investors tend to avoid costly securities that the CEFs have already invested into. Further tests show that investors with short-term investment horizon and investors with preferences towards small-cap value securities are driving the results. More importantly, these results can be generalizable to the U.K., suggesting that they are applicable to other markets with significant CEF industries.

The second essay looks at the performance of hedge fund option strategies. This study utilizes a large sample of hedge fund managers' option holdings directly from their Form 13F filings for the period between 1999 and 2012. A direct construction of a hypothetical tracking portfolio that mimics these hedge fund option strategies yields significant negative monthly returns. These results survive a series of robustness tests such as alternative performance evaluation methodologies, different assumptions on option characteristics, and subsample analyses. Furthermore, there is no performance differential between option strategies implemented by hedge funds and by other institutional managers, who are often deemed to be less sophisticated. Taken together, this study does not support the view that hedge fund managers are skillful in executing informed trades in the options market.

The third essay investigates the value of institutional brokerage relationship in the mutual fund industry. Specifically, this study exploits the recent collapse of Lehman Brothers on September 15, 2008 as a natural experimental setting to examine the performance of Lehman mutual fund clients subsequent to the collapse. This study finds Lehman clients with concentrated brokerage networks and those with specialization in small-cap securities are adversely affected. Using a difference-in-difference (DiD) approach, these client funds experience significant drop in risk-adjusted returns. Collectively, our results support the view that information and research services from the sell-side industry are indispensable inputs in enhancing mutual fund performance.