Tuesday, April 5, 2011

Miracles Do Happen -- Congratulations to Dr. Li Cai!

With so much negative news, I thought it appropriate to take a break from writing a scholarly paper to celebrate what is being called a true miracle.

One of our doctoral students, Ms. Li Cai, was struck by a car on October 2, 2008, outside of the Isenberg School of Management, and was thrown 20 feet. This horrible accident occurred in the early evening as she was making her way home, on a pedestrian walkway, and was heavily covered by the media.

She was deemed critical and remained in a coma for 38 days. Through the incredible support of her family, the local community, our Isenberg School of Management, and medical professionals, she pulled through.

Not only did she pull through, but, yesterday, on April 4, 2011, Li Ca successfully defended her doctoral dissertation in Finance.

Congratulations to Dr. Li Cai!

The announcement for her defense with title, abstract, and the Chair of her doctoral dissertation committee, which was disseminated to our school, are below.

Dissertation Defense by Li Cai

Monday, April 4th, 2011
ISOM Room 112

Chair: Professor Bing Liang

Title of Li Cai's Doctoral Dissertation: Three Essays Exploring Hedge Fund Dynamics


Hedge fund managers are largely free to pursue dynamic trading strategies and standard static performance appraisal is no longer accurate for evaluating hedge funds. Accordingly, this paper presents some new ways of analyzing hedge fund strategies following a dynamic linear regression model. Statistical residual diagnostics are considered to assess the appropriate use of the model. We unveil dynamic alphas and betas for each investment style during the period of January 1994 to December 2008. We examine the in-sample
goodness-of-fit and out-of-sample predictability on hedge fund performance. By simulating a hypothetical trading strategy, we demonstrate that the model-based predictability helps to implement a profitable fund selection process. Finally, timing skills can be directly examined with a dynamic model; we find significant evidence on market timing, volatility timing and liquidity timing, which is consistent with the timing literature in hedge funds.

This paper examines hedge fund asset allocation dynamics through conducting optimal changepoint test on an asset class factor model. Based on the average F-test and the Bayesian Information Criterion (BIC), we find that dynamic hedge funds have significantly better quality than non-dynamic funds, signaled by lower volatility, stricter share restrictions, and high water mark provision. In particular, a higher degree of dynamics is shown to be associated with better risk-adjusted performance at the individual fund level. We find that the degree of a fund's dynamics is also related to share restrictions. However, the outperformance of highly dynamic funds is robust even after controlling for share restrictions. Sub-period analysis suggests
that the superiority of asset allocation dynamics is mostly driven by earlier time periods before the peak of the technology bubble. Flow analysis suggests that returns in the hedge fund industry are diminishing as capital flows in and arbitrage opportunities are not infinitely exploitable.

In this paper we study hedge fund styles by examining both prospectus-based classification and a return-based classification on a sample of hedge funds over the period of 2005 to 2011. Using seven
versions of the Lipper/TASS data, we are able to track prospectus-based classification on an annual basis. Although the two classifications are not consistent to each other, we show that style shifts exist in both classifications, suggesting that the static hedge fund style classification is inappropriate. By constructing a
disagreement measure between the two classifications, we argue that the disagreement is related to manager skills rather than strategic misclassification. Further, we demonstrate that investors react positively to the disagreement measure and money flows to top-performing funds based on prospectus-based styles.

Moreover, Dr. Cai has accepted a job offer from the Illinois Institute of Technology.

We wish her and her family much professional success and personal happiness.

Miracles Do Happen!