ΔFutci,m : variation of the monthly percentage invested in future contracts by fund i in month m, where ΔFutci,m,y = Futci,m,y - Futci,m-1,y. |
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According to Chen (2011Chen, Y. (2011). Derivatives use and risk taking: evidence from the hedge fund industry. Journal of Financial and Quantitative Analysis , 46,(4), 1073-1106. ) managers can employ derivatives for speculative or hedging purposes, which can affect the risk assumed by fund in the long term. |
ΔForwci,m : variation of the monthly percentage invested in forward contracts by fund i in month m, where ΔForwci,m,y = Forwci,m,y - Forwci,m-1,y. |
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ΔOpti,m : variation of the monthly percentage invested in option by fund i in month m, where ΔOpti,m,y = Opti,m,y - Opti,m-1,y |
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ΔSwapi,m : variation of the monthly percentage invested in swaps by fund i in month m, where ΔSwapi,m,y = Swapi,m,y - Swapi,m-1,y. |
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Dmangi : dummy regarding the type of the relation between the fund’s administrator and manager. It is 0 if both belong to the same financial group and 1 otherwise. |
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As suggested by Iquiapaza (2009Iquiapaza, R A. (2009). Performance, captação e foco das famílias de fundos de investimento. (2009). [Doctoral dissertation, Universidade Federal de Minas Gerais, Belo Horizonte, Brasil]. ) it is important to verify if the manager and the administrator belong to the same financial group (since it would contribute to conflict of interest problems), which would affect the funds’ performance. |
ri,m : monthly percentage return obtained by fund i, in month m. |
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Opazo, Raddatz and Schmukler (2015Opazo, L., Raddatz, C., Schmukler, S.L. (2015). Institutional investors and long-term investment: evidence from Chile. World Bank Economic Review, 1, 479-522.) employed both variables to explain the fund’s risk changing. The variable ri,m-1 was also employed by Agarwal, Daniel and Naik (2009Agarwal, V.; Daniel, N. D.; Naik, N. (2009). Role of managerial incentives and discretion in hedge fund performance. Journal of Finance, 64(5), 221-2256.) to verify the impact of past performance on present return.. |
ri,m-1 : monthly percentage return obtained by fund i, in month m-1. |
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Dlevergi : dummy equal to 1 if fund i is allowed to adopt leverage strategies and equal to 0 otherwise. |
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Chen (2011Chen, Y. (2011). Derivatives use and risk taking: evidence from the hedge fund industry. Journal of Financial and Quantitative Analysis , 46,(4), 1073-1106. ) used this dummy as a proxy for funds that are able or not to use derivatives for speculative purposes. |
Sizei,m : natural logarithm of the fund’s net worth in month m. |
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Employed by Edwards and Caglayan (2001Edwards, F. R.; Caglayan, M. O. (2001). Peformance and manager skill. The Journal of Future Markets, 21(11), 1003-1028.), Do, Faff and Wickramanayake (2005Do, V.; Faff, R.; Wickramanayake, J. (2005). An empirical analysis of hedge fund performance: the case of Australian hedge funds industry. Journal of Multinational Financial Management, 15(4-5), 377-393.), and Soydemir, Smolarski and Shin (2014Soydemir, G., Smolarski, J.; Shin, S. (2014). Hedge funds, fund attributes and risk adjusted returns. Journal of Economics and Finance, 38(1), 133-149.) as a factor to explain the hedge fund performance. |
Agei,m : natural logarithm of the difference between the current date (or the liquidation date, if the fund ends before the last data in our sample period) and the fund’s opening date. |
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According to Brown; Harlow and Starks (1996Brown, K. C.; Harlow, W. V.; Starks, L. T. (1996). Of tournaments and temptations: an analysis of managerial incentives in the mutual fund industry. The Journal of Finance, 51(1), 85-110. ) younger funds invest more in risky assets, trying to get a better performance, mainly when they do not have a long return time series. It was also employed by Edwards and Caglayan (2001Edwards, F. R.; Caglayan, M. O. (2001). Peformance and manager skill. The Journal of Future Markets, 21(11), 1003-1028.) in their study of hedge funds’ return. |
Dbenchi : dummy equal to 1 if fund i is below the benchmark (the reference index used to calculate the performance fee) and 0, otherwise. |
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According to Basak, Pavlova and Shapiro (2008Basak, S.; Pavlova, A.; Shapiro, A. (2008). Offsetting the implicit incentives: benefits of benchmarking in money management. Journal of Banking and Finance , 32(9), 1883-1893.) risk management practices also account for benchmarking. |
Dcati : dummies representing the three Anbima’s (Brazilian Association of Financial Market Institutions) classifications of funds such as “Strategy” (Dcat1i), “Allocation” (Dcat2i) and “Investment abroad” (Dcat3i)**. |
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Chen (2011Chen, Y. (2011). Derivatives use and risk taking: evidence from the hedge fund industry. Journal of Financial and Quantitative Analysis , 46,(4), 1073-1106. ) grouped the funds according to their categories in their risk and performance analyses |
Dyeari : dummies representing each year of the sample (time fixed effect). |
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It was an effort to capture the effect of high volatilities periods occurred in Brazil, which would affect our analysis |
Rfm: In terms of “risk factors” the following variables are considered (in monthly periods |
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It is in accordance with Bali, Brown and Caglayan (2011Bali, T. G.; Brown, S. J.;Caglayan, M. O. (2011). Do hedge funds’ exposures to risk factors predict their future returns? Journal of Financial Economics, 101(1), 36-68.): stocks (Ibrx-100m , Ibovespam and Carhart(1997Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance , 52(1), 57-82.) factors); government bonds (ima-geral m); corporate bonds (Ida-Geralm); domestic interest rates (Cdi-overm; Selic-overm); foreign currency (dollar (Dolm) and euro (Eur m) exchange rates); commodities price (Icb m); and inflation (Ipca m). |
Size2i,m: the inverse of the natural logarithm of the value of fund assets in month m. |
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Factor used by Edwards and Caglayan (2001Edwards, F. R.; Caglayan, M. O. (2001). Peformance and manager skill. The Journal of Future Markets, 21(11), 1003-1028.) for capturing the possible non-linear relation between performance and fund’s size. |
MangFeei : management fee charged by fund i (percentage of net worth). |
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Sirri and Tufano (1998Sirri, E. R. and Tufano, P. (1998). Costly search and mutual fund flows. The Journal of Finance , 29(1), 312-312.) highlight that funds which decrease their manager fees in a particular period are more prone to grow faster. |
Smbi,m : return of the low market capitalization stock portfolio minus the return of the high market capitalization stock portfolio for fund i in month m. |
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Fama and French (1993) employed this factor to estimate hedge fund returns. |
Premiumi,m : return of the domestic stock market portfolio (Ibovespa) minus the return of the domestic risk-free asset (Cdi-over) for fund i in month m. |
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Fama and French (1993) employed this factor to estimate hedge fund returns. |
Hmli,m : return of a stock portfolio with a high ratio of accounting value / market value minus the return of a stock portfolio with a low ratio of accounting value / market value for fund i in month m. |
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Fama and French (1993) employed this factor to estimate hedge fund returns. |
Wmli,my : return of a winner stock portfolio less the return of a loser stock portfolio for fund i in month m. |
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Fama and French (1993) employed this factor to estimate hedge fund returns. |
cmreti,y-1 : annual return of fund i in year y-1. |
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This variable aims to capture the effect of past return on present return as observed by Agarwal, Daniel and Naik (2009Agarwal, V.; Daniel, N. D.; Naik, N. (2009). Role of managerial incentives and discretion in hedge fund performance. Journal of Finance, 64(5), 221-2256.). |
Volreti,m : standard deviation of the fund i’s daily return in month m and year y multiplied by √ 21. |
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Huang, Wei and Yan (2007Huang, J.; Wei, K. D.; Yan, H. (2007). Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance, 62(3), 1273-1310.) observed that the funds’ flows could be impacted by the funds’ return volatility. |
r2 i,m-1 : monthly squared return obtained by fund i in month m-1. |
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As stated by Sirri and Tufano (1998Sirri, E. R. and Tufano, P. (1998). Costly search and mutual fund flows. The Journal of Finance , 29(1), 312-312.) and by Huang, Wei and Yan (2007Huang, J.; Wei, K. D.; Yan, H. (2007). Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance, 62(3), 1273-1310.), the funds’ flows are non-linear related with their past performance. Those with recently better performance suffer higher inflows while those with worse return suffer lower outflows. |
Dloseri,m-1 : performance dummy equal to 1 if the fund’s monthly return lagged in 1 month is in the group of loser funds (those with return lower than or equal to percentile 20), and 0, otherwise. |
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As stated by Huang, Wei and Yan (2007Huang, J.; Wei, K. D.; Yan, H. (2007). Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance, 62(3), 1273-1310.) these dummies would be helpful for the estimation of non-linear relations between funds’ flow and performance. |
Dmidi,m-1 : performance dummy equal to 1 if the fund’s monthly return lagged in 1 month in the group of middle funds (those with return lower than 80 or higher than percentile 20), and 0, otherwise. |
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As stated by Huang, Wei and Yan (2007Huang, J.; Wei, K. D.; Yan, H. (2007). Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance, 62(3), 1273-1310.) these dummies would be helpful for the estimation of non-linear relations between funds’ flow and performance. |
Dwini,m-1 : performance dummy equal to 1 if the fund’s monthly return lagged in 1 month, is in the group of loser funds (those with return higher than or equal to percentile 80), and 0, otherwise. |
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As stated by Huang, Wei and Yan (2007Huang, J.; Wei, K. D.; Yan, H. (2007). Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance, 62(3), 1273-1310.) these dummies would be helpful for the estimation of non-linear relations between funds’ flow and performance. |