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Alternative Investments - March 11, 2014

Paper on hedge fund flows by EDHEC-Risk Institute PhD in Finance graduate, Gideon Ozik, accepted by the Journal of Finance and Quantitative Analysis

Gideon Ozik, PhD
Research Associate, EDHEC-Risk Institute
President, Alphaness SAS

The paper, "Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows", co-authored with Professor Ronnie Sadka of Boston College, provides an assessment of the potential profits associated with trading based on inside information about hedge-fund investor flows. Focusing on share-restricted funds, it finds that funds with recent outflow underperform funds with recent inflow, especially for the group of funds with high personal investment of fund insiders and low corporate governance. The flow-based return spread amounts to 5.6% per year over 1998-2008, after controlling for various risk factors. This return spread is higher for funds with low-corporate governance. Furthermore, analysing the flows of fund families, it finds that the flow of low-fee funds leads that of high-fee funds in the same family, and that this effect is stronger for low-corporate governance fund families. These results provide a quantification of the potential profits from engaging in the alleged flow-front-running activity in the hedge-fund industry.

A working paper version of "Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows" may be found here.

Gideon Ozik holds the EDHEC-Risk Institute PhD in Finance, having joined the programme in 2008 as an executive track participant in the inaugural entering class. He is currently a Research Associate at EDHEC-Risk Institute and President of investment analysis firm, Alphaness SAS.