Hedge Funds and Stock Price Formation
Research Financial Analysts Journal | A Publication of CFA Institute Hedge Funds and Stock Price Formation Charles Cao, Yong Chen, William N. Goetzmann, and Bing Liang Charles Cao is Smeal Chair Professor of Finance at Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania. Yong Chen is associate professor of finance at Mays Business School, Texas A&M University, College Station, Texas. William N. Goetzmann is Edwin J. Beinecke Professor of Finance and Management Studies and director of the International Center for Finance at Yale School of Management, New Haven, Connecticut. Bing Liang is Charles P. McQuaid Endowed Professor of finance at Isenberg School of Management, University of Massachusetts Amherst, Amherst, Massachusetts. Using comprehensive quarterly Hedge funds have become the Galápagos Islands of finance. data on hedge fund stock hold- ings, we study the role of hedge —Andrew W. Lo, Adaptive Markets, 2017 funds in the process of stock price formation. We find that hedge n November 2016, Goldman Sachs launched a brand-new exchange- funds tend to hold undervalued traded fund (ETF), GVIP, to track the performance of its hedge fund stocks and that both hedge fund Iindex, the VIP. The VIP is based on fundamentally driven hedge fund ownership and trading by hedge managers’ “very important positions,” which are those that appear funds are positively related to most frequently among their top 10 long equity holdings. The VIP the degree of stock mispricing. A has outperformed the S&P 500 Index by an average of more than 2% portfolio of undervalued stocks annually since the index inception in 2001.
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