Professor of Finance, University of Massachusetts Amherst

Educational Background

Ph.D.   Finance, University of Iowa, 1995
M.S.    Quality Management and Productivity, The University of Iowa, 1990 
B.S.     Applied Statistics, Chinese Academy of Science, 1988
B.S.     Maritime Meteorology, Ocean University of China, 1982

Research Areas

Hedge Funds and Mutual Funds, Risk Management, Capital Market Anomalies, and Econometrics.


Delving into Hedge Fund Research with Breakthrough Models for Operational Risk
Earlier in life, he took the first National College Entrance Exam after the Cultural Revolution. He ended up as an assiduous professor for more than a decade, with an abiding love for financial education. As a sagacious pioneer on hedge fund research around the world, he sought for the best models to explain risk and returns of hedge funds. In this interview, we talk to Professor Bing Liang, a Professor of Finance in the University of Massachusetts Amherst and a full-time Visiting Professor of Finance at SAIF. Having witnessed SAIF’s growth from the very beginning, he sincerely hopes SAIF to stand out as a top business school globally.
Expertise in the field of hedge fund
“After many years of hard work, I finally found my favorite field to work, and will stick to it,” as Professor Liang recalled his study experience. When the National College Entrance Exam was reinstated in 1977, he was among the batch of students who took the first exam. “I was experiencing the Down to the Countryside Movement, at a time when there was limited access to information. As far as I can remember, I found the university list in People’s Daily,” he said.
With little information during that period, Professor Liang did not get a chance to study space-related programs as he wished. Instead, he graduated with a major in marine meteorology from the Ocean University of China. After graduation and self-learning for two years, he was admitted by the Institute of Applied Mathematics, Chinese Academy of Sciences, and received his master’s degree in Applied Statistics. In the United States, he sparked new interest in financial markets. So he pursued study in finance and obtained a Doctoral Degree in Finance from the University of Iowa.
"The finance field is really interesting, because it involves not only academic research, but also real world experiences in the market. I also found some connections between finance and meteorology that I studied before. For example, meteorology requires us to handle large amounts of data, just like massive amounts of data in financial markets. Plus, applied statistics is about analyzing and interpreting the data. So these three areas have something in common,” said Professor Liang.
After travelling to East Europe lately, Professor Liang spoke delightedly about foreign cultures and exotic food. Despite his busy schedule of teaching and research, he has been to more than 50 countries. “I enjoy travelling by myself, especially renting a car to drive around the country, wherever I want to go. By doing so, I can be connected with nature, and be flexible in capturing beautiful landscapes and ancient architectures with my camera.”
As an authoritative scholar in the field of hedge funds, Professor Liang is an editor for Journal of Alternative Investments and serves on the editorial boards for Journal of Investment Management and European Financial Management. In recognition of his outstanding contributions to research and teaching, he has received numerous awards, including Isenberg School of Management’s Outstanding Research Award in 2012 and 2011, Award for Outstanding Accomplishments in Research and Creative Activity, from University of Massachusetts in 2006, the BSI Gamma Foundation Award as well as the Best Paper Award at China International Conference in Finance in 2007. In 2003, he was invited as a panelist in the SEC’s Roundtable on Hedge Funds.
Seeking for the best models to measure operational risk
 “According to Hedge Fund Research in Chicago, there are over 10,000 hedge funds as of the third quarter of this year, running assets of $ 2.5 trillion globally. The industry is characterized by an asymmetric distribution. 6% of super hedge funds with each having over $ 5 billion assets, surprisingly take up 68% of the market share”, as Professor Liang cited the data.
In 2012, Professor Liang published a paper entitled “Trust and Delegation”. It studied operational risk in the hedge fund industry using due diligence reports. On the basis of some research he previously did, the paper established a ω-Model for quantifying operational risk. The model was a breakthrough in the field, because it not only measures operational risk, but also predicts future performance as well as the likelihood of subsequent fund disappearance. This paper was awarded the FAJ Graham and Dodd Awards of Excellence in 2009.
Citing some statistics that approximately half of the hedge fund failures result from operational risk, Professor Liang suggested that after the financial crisis, people from financial industries and academia felt the need to quantify operational risk of hedge funds with a risk model. However, since operational risk is too broad to define, and the data is barely accessible, it is tremendously difficult to depict operational risk by applying a model. That was the reason for the absence of research in this area.
Professor Liang pointed out differences between the risks of hedge funds and those of traditional industries. The latter emphasizes more on market volatility or the loss caused by market risk, while the hedge fund industry is relatively less transparent because of the loose regulation. Therefore, they were allowed considerable latitude in investing, meanwhile facing not only market risks but also operational risks that pertained to their internal activities, such as irregularities, fraud, or even a breach of stipulation. For example, operational problems range from limited disclosure on past legal or regulatory offenses and the failure to use a major auditing firm to the use of internal pricing on illiquid securities traded.
As for the quantitative models in the paper, Professor Liang explained, “we used a sample of 444 due diligence reports compiled by an independent hedge fund DD service provider, with third-party firms to verify trustworthiness, so as to fully investigate the hedge funds, obtain objective data, and disclose past regulatory and legal problems,” he suggested, “we found that there was a connection between past problems of hedge funds or the managers and a series of operating variables. For example, if the fund uses a well-known auditing firm, problems are less likely to occur, since the auditing firm typically pre-screens the hedge fund for any potential risk. Another variable of interest is the fund’s method of pricing securities, such as relying on internal pricing or relying solely on observed market prices. For instance, low liquidity makes an asset hard-to-price. Compared with third-party pricing from securities dealers, there is more room to maneuver for internal pricing by funds themselves. In that case, it establishes a connection between internal pricing and past/future problems. Additionally, we found 10% of asset factual misrepresentations, which could be regarded as a warning sign for fraud.”
“Whether it is internal pricing or external pricing, when applying a series of variables to construct a quantitative model to describe operational risk of the hedge fund, we found this model very useful. It can not only depict the past but also predict the future performance. Exposure to operational risk decreases future returns, and increases the likelihood of subsequent fund disappearance,” he explained. These models are also favorable to Chinese financial industries, especially for banks suffering from operational risk.
In comparison with overseas hedge fund industry, China’s hedge fund industry has just started. “China launched index futures and allowed short selling for the first time in 2010. It could signal a milestone for China’s financial market, because these two events changed the previous unilateral situation of going long only. New hedge funds started to emerge, such as the first macro hedge fund and Guo Tai Jun An’s first long/short hedge fund product. I think that 2011 sees the beginning of an era in China’s hedge fund industry,” said Professor Liang.
Professor Liang is optimistic that China’s hedge fund market will prosper in the future. “Developing hedge funds is an inevitable trend. By 2020, Shanghai will become an international financial center. For the growth in the near future, it will offer manifold financial products, develop capital markets to become broader and deeper, and open up great opportunities to hedge funds. In terms of the bottlenecks of China’s hedge fund market, he suggested, “one contributing factor is the absence of hedging instruments. Another is the cost of securities lending and the possibility of increasing leverage. Moreover, talents are essential. In China, short selling and index futures are relatively new. So it takes time for people to get familiar with both long and short directions. Therefore, the demand for professionals with overseas experience is huge. Yet, to attract talents takes time. Moreover, rather than existing independently, hedge funds use third-party systems, in the aspects of auditing, accounting, legal, custody, administration and so on. Only when these third-party service systems have developed to a certain extent, can they promote the development of hedge fund effectively. Meanwhile, sometimes financial innovations move forward, with policies lagging behind. Once the authorities spot a problem, they try to fix it with stipulations. Accordingly, it is significant to specify relevant policy, legislation, and regulation, so as to protect and support the development of the hedge fund industry. I think that regulatory authorities need to fulfill their own task.”
In recent years, considering Chinese stock’s anemic performance, investors turn to the concept of hedge funds. With individual investors taking up a large proportion in China’s market, however, there has been lots of misunderstanding and prejudice about hedge funds. Professor Liang believed that the development of hedge funds would immensely benefit the markets for two reasons. Firstly, it provides investment channels, and stimulates market liquidity with a large amount of hedge fund trading. In addition, because of a variety of arbitrage strategies, it can help the markets to discover prices and restore efficiency. “I will spend more time in training investors. It is our duty as educators to guide Chinese investors to have an impartial and comprehensive understanding about hedge funds,” said Professor Liang, “currently at the beginning of the hedge fund era, most of the Chinese investors are high net worth individuals, while a majority of overseas investors are institutional investors. Under this circumstance, it is crucial to educate investors systematically, including conveying the concepts of hedge funds, the downside of investment, as well as how to avoid certain risks, in order to make a stable profit in the long run.”
High hopes for China’s capital markets and SAIF
With rapid economic growth, China’s financial reform has been in the spotlight, remarkably attracting attention from researchers, domestic and overseas investors. Professor Liang also eyes its development. “I find China’s financial market unique in a way that it is dominated by banks. Banks play a significant role in all aspects while in developed counties, financial intermediaries, such as pension funds, insurance companies, investment banks, mutual funds, are basically running in parallel. In that case, the banking sector is one of the important components,” he pointed out.
From his perspective, China’s capital market has great potential for development. To develop a breadth and depth of capital markets is of great importance. It will not only benefit companies in terms of exploring financing channels and reducing their financing costs, but also provide investors with easier access to investment. In contrast, the banking sector functions only as an intermediary, whose role has its certain restrictions, and cannot replace roles of other financial intermediaries. Therefore, the question is how to develop capital markets? Professor Liang suggested, “The requirement is to orderly develop a wide range of products for the stock market, bond market, and derivatives market. Only by promoting simultaneous development of traditional market and alternative investment vehicles, can capital markets meet different needs. Consequently, there will be more investment channels for investors, more hedging instruments for hedge funds, as well as increasing opportunities for international cooperation.”
"To make China a real international financial power, capital markets need to develop as a whole. In that case, it requires numerous elements, including the fully convertible Renminbi, capital account liberalization, as well as interest rate liberalization. China’s GDP will have the potential to rise to No. 1 in the world. To develop China as the biggest economy, RMB should not have limited convertibility; instead, it should be a freely convertible currency, which means a lot worldwide. Therefore, it is our mission to carry this forward,” said Professor Liang.
Likewise, Professor Liang have great expectations for SAIF, which was born with a mission to cultivate high-end financial talents, provide a think tank and contribute to Shanghai’s continued growth. “Although SAIF was newly established four years ago, it has already completed a journey that may take most schools ten years. As a Special-term Professor since it was founded, I am very proud of it. Going through ups and downs together with SAIF in the past four years, I have gained a lot and have hope for its wonderful future,” he said.
To become one of the world-class educational institutes, conducting top-notch academic research would be essential, he suggested. At SAIF, both full-time and special-term faculty members have prominent research records, promoting the institute forward. Moreover, to develop SAIF as the Whampoa of financial education that cultivates top financial talents, first-grade programs mean a lot. Professor Liang also believes that China Academy of Financial Research (CAFR) aims to make contributions to the society. “Each researcher and professor can make a difference by conducting research on China’s monetary policy, or moving academic results to the marketplace. In this case, CAFR will be able to contribute as a think tank to national policy making,” said Professor Liang.