Prof Melvyn Teo Wins MOE Tier 2 Grant for LKCSB

Melvyn TEO
Professor of Finance and Associate Dean (Research)
SMU Lee Kong Chian School of Business

Co-project Investigator: Yuehua TANG, Assistant Professor of Finance, SMU Lee Kong Chian School of Business

Project Title: What Drives Alpha in Asset Management? Evidence from Hedge Funds and Private Equity Partnerships

Overview:

What drives alpha in the asset management industry? The extant literature provides a few clues. We know that smarter, more connected, better incentivised, newer, and geographically proximate fund managers tend to outperform other fund managers. Still, there remains much to be done.

To deepen the understanding of alpha generation in the context of hedge fund and private equity industries, the proposed research aims to produce a trio of papers whereby the first paper will investigate the protégé effect in the hedge fund industry by testing whether emerging hedge fund managers who have previously worked for reputable hedge fund firms with stellar track records are better able to deliver alpha. The second paper will explore the importance of investment discipline in asset management. The project researchers will test whether the ability to steer clear of behavioural biases would allow hedge fund managers to consistently deliver alpha. The third paper will study the value of human capital to private equity performance.

From their preliminary work, the researchers found that funds with financial, technical, management, and networking skills outperformed funds without such skills. Specifically, funds with top quintile expertise levels delivered internal rates of return that were 5.4 per cent per year greater than funds with bottom quintile expertise levels. Funds with many experts were also able to generate 50 cents more for every dollar invested, and outperformed public markets by 31 per cent more relative to funds with few experts.

The proposed research will deepen market understanding of what it takes to succeed in the hedge fund and private equity space. The findings will be especially relevant for limited partners who are allocating capital to hedge fund and private equity partnerships, and general partners who are setting up their own shops or partnerships. 

Back to Research@SMU Issue 17 (Aug 2014)