Williamsburg Expert Financial Analysis, LLC

WEFA, LLC provides specialized analysis in finance, including expert witness testimony, company valuation, market studies and consulting services.

WEFA combines practitioner experience with academic leadership to design and deliver expert solutions to complex problems.

WEFA Principal John Merrick 
has split his professional career between academia and Wall Street and brings eleven years of experience  in research, product management and proprietary trading in securities and derivative markets. His academic research program focuses on securities and commodities market frictions, asset and derivative contract valuation, and market manipulation.

WEFA Principal Vladimir Atanasov  consults with start-up companies, private equity funds and investment companies concerning equity valuation, private equity investment contracts, portfolio management, asset allocation and product development. He is an academic leader in applying higher standards of test design for making causal inferences regarding attribution of impacts and damages in financial settings (see “Shock-Based Causal Inference in Corporate Finance Research,” in  Critical Finance Review, 2016)

Causal Inferences about Damages: Design Matters

Do financial intermediaries interact with customers who are attempting to execute a strategy to manipulate a market? If so, these financial intermediaries may share part of the blame for any damages caused. In such a case, a methodology to estimate the how much of total damages should be attributed to these intermediaries needs to be designed.  

In “Financial Intermediaries in the Midst of Market Manipulation: Did They Protect the Fool or Help the Knave?" (Journal of Corporate Finance, 2015), WEFA Principals Atanasov and Merrick design "but for" platinum and palladium futures contract pricing benchmarks that separate the impacts of the manipulating customer's bang-the-close trades from those of NYMEX metals market floor traders whose actions produced noncompetitive prices. 

Such custom pricing benchmarks based on specific underlying market structure permits proper attribution of damages caused in a case with multiple actors.

Too Good to Be True Performance

UPDATE: On April 28, 2020, the SEC announced a settlement with one of our 12 Highly Questionable funds:

New York Investment Adviser Settles Charges of Misleading Investors About Mutual Fund Performance.

Just 11 more to go!

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How should investor regard mutual funds that report returns that seem too good to be true? If the funds hold substantial positions in structured products like asset-backed securities and private-label collateralized mortgage obligations, we say “with suspicion.”

In “Mismarking Fraud in Mutual Funds,” WEFA Principals Vladimir Atanasov and John Merrick and Philipp Schuster of Karlsruhe Institute of Technology develop a filter to identify funds that likely mismark certain structured products and thus inflate their net asset value (NAV) and returns. Applied to all structured product-oriented funds launched between January 2010 and March 2017, the filter identifies 12 Highly Questionable funds whose performance matches closely the predicted pattern of mismarking: extremely high alpha and skewness, particularly immediately after launch.

Mismarking can seriously inflate return-since-inception metrics. During the first three months after launch, the 12 Highly Questionable funds report annualized mean net-of-benchmark returns that are more than +18% per year higher than our baseline funds.

The performance inflation caused by mismarking benefits the managers. The average initial 3- year Morningstar Rating for the nine of the identified funds receiving their initial 3-year Morningstar Rating within our sample period was 4.7 out of 5—1 to 1.4 stars higher than those of other funds. Moreover, their corresponding growth in assets averaged $1 billion a year more than the other funds.

As of March 31, 2017, the 12 funds managed a combined $75 billion and received management fees of about $450 million per year. About $26 billion (35%) of the assets were held in mismarking-prone positions.

Because all fund share issuance and redemption occurs at the stated fund NAV, mark inflation causes significant losses to later investor cohorts.