More Institutions Dispense with Hedge Funds As an Asset Class

June 4, 2013 Leave a comment

More Institutions Dispense with Hedge Funds As an Asset Class

03 JUN 2013 – IMOGEN ROSE-SMITH

At its February meeting the board and the six-person investment committee of the Employees Retirement System of  Texas made a big decision. They voted to integrate hedge funds across the system’s $24.9 billion portfolio — using them within certain asset classes, like equities and fixed income — instead of simply lumping these investments into a separate allocation.

The Austin, Texas–based retirement fund joins a growing number of U.S. pension funds that are taking a more open approach to hedge fund investing, among them the Teacher Retirement System of Texas and the Virginia Retirement System. The practice is already quite common among foundations and endowments, including such respected university endowments as those of the University of Virginia and the University of   Texas at Austin. At University of   Texas Investment Management Co., CIO Bruce Zimmerman views asset allocation as a matrix, with the market along one axis and investment funds and their liquidity profiles along the other. For example, U.S. equities could include a long-short equity hedge fund, a long-only manager, an activist equity manager and private equity. Read more of this post

Filed under Macro Trends

Equity Vesting and Managerial Myopia

June 4, 2013 Leave a comment

Equity Vesting and Managerial Myopia

Alex Edmans London Business School – Institute of Finance and Accounting; University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Vivian W. Fang University of Minnesota – Twin Cities – Department of Accounting

Katharina Lewellen Dartmouth College – Tuck School of Business

May 25, 2013

Abstract: 
This paper links the imminent vesting of a CEO’s equity to reductions in real investment. Existing studies measure the manager’s short-term concerns using the sensitivity of his equity to the stock price. However, in myopia theories, the driver of short-termism is not the magnitude of incentives but their horizon: equity will not induce myopia if it has a long vesting period. We use recent changes in compensation disclosure to introduce a new empirical measure that is tightly linked to theory – the stock-price sensitivity of shares and options vesting over the upcoming year. This sensitivity is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities. A one standard deviation increase in the sensitivity of imminently vesting equity is associated with a decline of 0.23% in the growth of R&D (scaled by total assets), 75% of the average R&D growth rate of 0.3%. Similar results hold when including advertising and capital expenditure. In addition, CEOs with imminently-vesting equity are significantly more likely to meet or beat analyst earnings forecasts by a narrow margin.

Filed under Research

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