Dividend payments have been on a systematic decline since 1972, and the percentage of firms paying a dividend has declined from 63.8 percent in 1972 to 30.4 percent in 2011. The question is now, What does paying dividends tell us about possible returns? Even after controlling for firm characteristics, companies have become less likely to…
The presence of regularly occurring anomalies in conventional economic theory led to the development of the field of behavioral finance, and the volatility anomaly is one that deserves some special attention. Anomalies directly violate modern financial and economic theories, which assume rational and logical behavior. We now have a laundry list of anomalies, including…
It’s long been known that many investors have a preference for cash dividends. But from the perspective of classical financial theory, this behavior is an anomaly. Here’s why. It’s perplexing behavior because before taking into consideration what are referred to as “frictions” such as transaction costs and taxes, dividends and capital gains should be perfect…
Over the last few years we’ve seen a dramatic increase in interest in dividend-paying stocks. The heightened interest has been fueled by both the media hype and the current regime of interest rates that are well below historical averages. The low yields available on safe bonds led even many once-conservative investors to shift…
Hedged (long/short) mutual funds are the money management industry’s answer to illiquid hedge fund strategies. The premise of long/short funds is that the managers can apply their security-selection skills to a broader opportunity set, which is to say they can go both long and short, instead of long only. The broader opportunity set should make…
While embarking on scenic tours can make life both interesting and exciting, they’re best avoided when it comes to the world of investing. The reason is that most “interesting” investments fail to deliver on their promise of returns sufficient to compensate for their incremental risks. This has been especially true of hedge funds. And it…
There’s an interesting paper from Martijn Cremers, a professor of finance at the University of Notre Dame, on the performance of emerging market stocks that are the publicly traded affiliates of multinational companies. But like so much in the world of investing, Cremers’ findings, while certainly alluring, need to be examined closely before investors jump into…
Last year certainly provided active managers with plenty of opportunities to outperform, and it’s worth examining if they really did. For example, while the S&P 500 Index returned 32.4 percent, Netflix (NLFX), the top performer in the index, returned 297 percent. Two other stocks, Micron Technology (MU) and Best Buy Co. (BBY) returned more than…
Investors would love to be able to achieve positive returns in both bull and bear markets, and that’s the “promise”—or at least the premise—of absolute-return funds.
In an effort to achieve returns that exceed those of the publicly available stock and bond markets, many large pension plans turn to alternative investments such as private equity. California’s CalPers, one of the nation’s largest public pension plans, while using equity index funds for more than one-third of its investments, is increasing its exposure to alternatives.
There are many well-documented problems with investing in hedge funds, and it’s hard to know where to start in pointing them out.
Among them are: lack of liquidity; lack of transparency; loss of control over the asset allocation and thus risk of the portfolio; non-normal distribution of returns (they exhibit excess kurtosis and negative skewness); and they have a high risk of dying (12.3 percent per year from 1994 through 2008).