WEST PALM BEACH, FL (HEDGECO.NET) – A newly released study has challenged the widely held belief that hedge funds play an important role in the markets by helping to improve market efficiency,particularly in the area of mispriced securities. The new study conducted by Stefan Nagel, assistant professor of finance at the Stanford Graduate School of Business, has concluded that hedge fundsfailed to serve such efficient market function during the recent technology bear market.<\/p>\n
According to the study, not only did hedge funds fail to fill such role, they also exploited this condition to their own advantage. The study jointly authored by Nigel and Markus Brunnermeier of Princeton University said hedge fund managers knew about the apparent bubble in the technology sector. The study said, “our evidence casts doubt on the presumption underlying the efficient markets hypothesis: that it is always optimal for rational speculators to attack a bubble.”<\/p>\n
The research further said, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdThere is no evidence that hedge funds as a whole exerted a correcting force on prices during the technology bubble, among the few large hedge funds that did resist (the bubble), the manager with the least exposure to technology stocks — Tiger Management — did not survive until the bubble burst.”<\/p>\n
The study also noted that Tiger Management did not take major positions in the technology stocks, because the management believed such stocks were over priced. This view was consequently proved correct, but the fund\u00c3\u00af\u00c2\u00bf\u00c2\u00bds returns failed to measure up to the other funds, leading it to fold. Nigel said, “The key to this is that if you feel you can predict what the irrational guys are doing, then it may be entirely rational to buy irrationally priced stocks.\u00c3\u00af\u00c2\u00bf\u00c2\u00bd He added, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdIt seems that the hedge funds did exploit such predictability during (the bubble).”<\/p>\n
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net<\/p>\n
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