Hedge Fund Performance 1990-2000: Do the "Money Machines" Really Add Value?

Abstract

In this paper we investigate the claim that hedge funds offer investors a superior riskreturn trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990-April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds. .

Efeito Calendário e Finanças Comportamentais no Segmento de Fundos Multimercados

“…Neste ponto, é importante destacar que o tema de fundos de investimento proporciona estudos e pesquisas no cenário internacional (Amin & Kat, 2003;Brooks & Kat, 2002) e brasileiro (Malaquias & Eid, 2013;Rochman & Eid, 2006). Além disso, a indústria de fundos de investimento vem apontando significativo crescimento ao longo dos últimos anos (Gomes & Cresto, 2010;Malaquias & Eid, 2014).…”

Just How Much Do Individual Investors Lose By Trading?

“…For studies of pension fund performance, see Ferson and Khang (2002); Lakonishok, Shleifer, and Vishny (1992); Coggin, Fabozzi, and Rahman (1993); Christopherson, Ferson, and Glassman (1998); Delguercio and Tkac (2002); Coggin and Trzcinka (2000); and Ikenberry, Shockley, and Womack (1998). In analyses of hedge funds, Ackermann, McEnally, and Ravenscraft (1999); Brown, Goetzmann, and Ibbotson (1999); Liang (1999); and Agrawal and Naik (2000) provide evidence of superior returns, though Amin and Kat (2003) argue that hedge fund performance results may be attributable to the skewed nature of hedge fund payoffs, which when appropriately accounted for, renders hedge fund performance unremarkable.…”

Hedge funds and higher moment portfolio selection

“…4 These studies observe that mean-variance portfolio optimisation makes the key assumption of normal asset return distributions. Lo 14 states that 'hedge-fund returns are highly non-normal, ie, they are asymmetrically distributed, highly skewed, often multi-modal, and with fat tails that imply many more tail events than the normal distribution would predict'.…”