RESEARCH
Recent research
CFA Society of the UK monitors the research output of all CFA Institute
Program Partners in the UK. Where possible, the society posts these pieces
directly on its website. A selection of excerpts from these is published here.
DO HEDGE FUNDS MANAGE THEIR REPORTED RETURNS? In particular, we fi nd that analysts make signifi cantly
Vikas Agarwal, Georgia State University and CFR greater use of ‘non-fi nancial’ forward-looking information
Naveen D Daniel, Drexel University when covering fi rms in high-growth (loss-making) sectors
Narayan Y Naik, London Business School
compared with low-growth (profi table) sectors. They also
make signifi cantly greater use of multiple year forecasts for
fi rms in less risky sectors. We also hypothesise and fi nd that
analysts choose the forward-looking content of their reports to
support the case they want to make. In particular, we fi nd that
the use of forward-looking qualitative information is driven to
ABSTRACT – We fi nd that hedge fund returns during some extent by analysts’ attempts to rationalise the recent
December are signifi cantly higher than those during the rest of stock price and to justify why their target prices differ from the
the year, even after controlling for funds’ risk exposures and recent stock price and their stock recommendations.
factor risk premiums in December. More important, we fi nd We also fi nd that the use of good news information is
that this December spike is higher for funds with greater driven by the growth characteristics of the sector and the
incentives and greater opportunities to infl ate returns. These analysts’ intention to justify the recent stock price and their
results suggest that hedge funds manage their returns upwards stock recommendations. The potential importance of our
in an opportunistic fashion in order to earn higher fees. fi ndings for the development of the OFR is discussed briefl y.
Finally, we provide evidence that funds infl ate December
returns by under-reporting returns earlier in the year and/or by
borrowing from January returns in the following year.
AN ASSESSMENT OF THE INTERNAL RATING BASED
APPROACH IN BASEL II
Simone Varotto, ICMA Centre, University of Reading
WHAT DRIVES THE FORWARD-LOOKING
CONTENT OF SELL-SIDE ANALYSTS’ REPORTS? ABSTRACT – The new bank
Khaled Hussainey, Stirling University capital regulation, known as
Martin Walker, Manchester University Basel II, includes an
internal rating based
approach (IRB) to
measuring credit risk in bank portfolios. The IRB relies on
the assumptions that the portfolio is fully diversifi ed and that
systematic risk is driven by one common factor. In this work,
we empirically investigate the impact of these assumptions by
ABSTRACT – This paper examines the factors that drive the comparing the risk measures produced by the IRB with those
forward-looking content of analysts’ reports for UK listed of a more general credit risk model that allows for multiple
companies. From a content analysis of 171 reports we systematic risk factors and portfolio concentration. Our tests,
hypothesise and fi nd that industry-specifi c characteristics drive conducted on a large sample of Eurobonds over a 10-year
analysts to use different types of forward-looking information period, reveal that deviations between the IRB and the
when writing their reports. general model can be substantial.
42 WINTER 2008/09
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