Hedge fund returns under crisis scenarios: A holistic approach

Abstract

The assets of the hedge fund industry are nearly equivalent to the GDP of the UK. The industry, which claims returns independent of markets conditions and has been blamed for economic crises, has attracted the interest of a wide range of financial and political players and academics. This paper, using monthly series performance data since January 1995, at a fund strategy level and S&P500, and a holistic and a developed dynamic correlation quantitative approach, aims to challenge the allegations and the claims, which have been made on rather incomplete research grounds. Statistically, the results strongly reject the claims of the vast majority of fund strategies, excluding the case of the macro and short strategies, over the crisis periods, suggesting that they cannot protect their investors like S&P500. Regarding the allegations, it is inferred that Hedge Funds are used in most cases as a scapegoat rather than actually being the cause of the crises.

Hedge Fund Performance during and after the Crisis: A Comparative Analysis of Strategies 2007–2017

“…Consistent with the findings of Capocci (2002) and Stoforos et al (2016), the study showed no fund manager was able to generate a significant alpha over the crisis period. However, market beta was significant for all strategies, except Equity Market Neutral and Managed Futures, in this period.…”

“…Their study showed that hedge funds with illiquid portfolios had lower returns and alphas, compared to hedge funds with more liquid portfolios, during crisis periods. Capocci and Hübner (2004) and Stoforos et al (2016) analysed hedge fund performance during crises. Both concluded that hedge funds suffered from losses and could not reach their goal of higher absolute returns.…”

“…Data on the research by Boasson and Boasson (2011) on US hedge funds showed that hedge funds have significant correlations with the market (high for all strategies, except Global Macro and Fixed Income), although they concluded that investments in hedge funds offer the benefits of diversification. Stoforos et al (2016) studied US hedge fund data on thirteen hedge fund strategies, for a period of 19 years (1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014), and found that the average dynamic correlations increased for hedge funds in crisis periods, a finding confirmed by Forbes and Rigobon (2002) and Guesmi et al (2014). Their data also showed that dynamic correlation coefficients decreased significantly in the non-crisis period, only for Global Macro and Short Selling strategies.…”

“…The S and P 500 has been used as a proxy for the Market Portfolio in many hedge fund studies. Examples are the studies performed by Liang and Kat (2001), Amin and Kat (2003) or Stoforos et al (2016). Capocci (2002) used a value-weighted portfolio of all stocks on the NYSE, Amex and Nasdaq, instead of only using the largest 500.…”

“…Due to its large proportion of total market value, it widely reflects the entire U.S. equity market and the economic health of the United States (Nasdaq 2018). As a result of globalisation in the financial markets the S and P, furthermore, reflects international events, to a large extent (Stoforos et al 2016).…”