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What Is the Nature of Hedge Fund Manager Skills? Evidence from the Risk-Arbitrage Strategy

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  • Cao, Charles
  • Goldie, Bradley A.
  • Liang, Bing
  • Petrasek, Lubomir

Abstract

To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk-arbitrage portfolio by 3.7% annually on a risk-adjusted basis, whereas non–hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds’ superior performance does not reflect fund managers’ ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers’ superior performance is attributed to their ability to manage downside risk.

Suggested Citation

  • Cao, Charles & Goldie, Bradley A. & Liang, Bing & Petrasek, Lubomir, 2016. "What Is the Nature of Hedge Fund Manager Skills? Evidence from the Risk-Arbitrage Strategy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(3), pages 929-957, June.
    • Handle: RePEc:cup:jfinqa:v:51:y:2016:i:03:p:929-957_00
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    Cited by:

    1. Charles Cao & Grant Farnsworth & Hong Zhang, 2021. "The Economics of Hedge Fund Startups: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 76(3), pages 1427-1469, June.
    2. Yang, Fan & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2024. "Where Have All the Alphas Gone? A Meta-Analysis of Hedge Fund Performance," MetaArXiv ps2yn, Center for Open Science.
    3. Fan Yang & Tomas Havranek & Zuzana Irsova & Jiri Novak, 2022. "Hedge Fund Performance: A Quantitative Survey," Working Papers IES 2022/15, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2022.
    4. Daniel Thomson & Gary van Vuuren, 2018. "Attribution of hedge fund returns using a Kalman filter," Applied Economics, Taylor & Francis Journals, vol. 50(9), pages 1043-1058, February.
    5. George O. Aragon & Ji-Woong Chung & Byoung Uk Kang, 2023. "Do Prime Brokers Matter in the Search for Informed Hedge Fund Managers?," Management Science, INFORMS, vol. 69(8), pages 4932-4952, August.
    6. Dai, Na & Nahata, Rajarishi & Brauner, Aaron, 2022. "Does individualism matter for hedge funds? A cross-country examination," Journal of Corporate Finance, Elsevier, vol. 72(C).
    7. Antonio Roma, 2022. "Is the value effect due to M&A deals? Evidence from the Italian stock market," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.

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