Mispricing chasing and hedge fund returns

Tianyi Ma, Baibing Li and Kai-Hong Tee

Journal of Empirical Finance, 2022, vol. 68, issue C, 34-49

Abstract: Various anomalies identified in the literature provide investors with enormous opportunities to chase mispriced stocks. This paper investigates hedge funds’ mispricing-chasing behaviors. We use two mispricing factors in the literature, namely Anomaly-Long and Anomaly-Short, to develop a mispricing-chasing model, through which we examine the evidence of mispricing-chasing behaviors among equity-oriented hedge funds. We find that, faced with different types of mispricing opportunity, hedge funds exploit mispricing opportunities differently, either by capturing the underlying market exposure or reaping profits via short selling. Extending the fund classification model in the literature, we classify funds into different skill groups. We find approximately one-third of the equity-oriented hedge funds are classified as excellent/good mispricing chasers. Furthermore, we evaluate the underlying determinants for funds’ grouping and find that excellent/good mispricing chasers tend to be of smaller size, to charge a higher actual annual fee, and to have been established for a shorter time. This finding not only serves as an important reference for investors when selecting profitable hedge funds, but also provides important information helping hedge funds to stay competitive in the industry.

Keywords: Anomaly; Fund classification; Hedge funds; Mispricing chasing (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:68:y:2022:i:c:p:34-49

DOI: 10.1016/j.jempfin.2022.05.002

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