Asset Management

This paper studies how hedge fund activism impacts corporate innovation. Firms targeted by activists improve their innovation efficiency over the five-year period following hedge fund intervention. Despite a tightening in research and development (R&D) expenditures, target firms increase innovation output, as measured by both patent counts and citations, with stronger effects among firms with more diversified innovation portfolios. Reallocation of innovative resources, redeployment of human capital, and change to board-level expertise all contribute to improve target firms' innovation.

In “The Intelligent Investor in an Era of Autonomous Learning”, Jeffrey Tarrant delineated the concept of Autonomous Learning Investment Strategies (ALIS), the new AI and data-driven strategies he argued would disrupt today’s fundamental and quantitative managers.  This was followed by an article I wrote, “What a long strange trip it’s been...on ALIS”, which explained the best and worst traits of ALIS managers.  This brief article is called “Think Twice, It Ain’t Alright...ALIS Clarified”, repurposing the title of Bob Dylan’s 1963 song, “Don’t Think Twice, It’s Alright”. 

We examine the effects of financial reporting regulation on firms' banking. Exploiting discontinuous public disclosure and auditing requirements assigned to otherwise similar small and medium-sized private firms, we document that financial reporting regulation reduces firms' reliance on concentrated and local bank relationships and increases banks' reliance on firms' financial reporting, consistent with a shift in firms' banking from relationship toward transactional approaches.

As technology disrupts industry after industry, it is logical to expect the hedge fund industry will be similarly disrupted. We pose the question: How will that disruption happen and where will it come from?

Recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers. This paper develops a life-cycle portfolio-choice model in which the investor experiences loss-averse utility over news and can ignore his portfolio. In such a model, the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news cause a first-order decrease in utility.

We have titled this paper with an ode to a compilation album by a band that was founded in Palo Alto and developed a counter-culture.  Though the title espouses a new state of mind, it is investment, not consumption driven, as this is 2017 and not 1965.

Value stocks earn higher returns than growth stocks on average, but a “value” position can turn against the investor. Fundamental analysis can explain this so-called value trap: The investor may be buying earnings growth that is risky. Both the earnings-to-price ratio (E/P) and the book-to-price ratio (B/P) come into play. E/P indicates expected earnings growth, but price in that ratio also discounts for the risk to that growth; B/P indicates that risk. A striking finding emerges: For a given E/P, a high B/P (“value”) indicates higher expected earnings growth--but growth that is risky.

We propose new metrics for investment performance based on short-run trading profitability. Since investment opportunities are scarce and value-relevant information decays over time, marginal decisions made by fund managers (i.e., trades) should provide more accurate signals about underlying skill than portfolio alphas, which are contaminated by the returns on "stale" positions.