An empirical analysis of short-biased hedge funds’ risk-adjusted performance: A panel approach

Abstract

This article investigates the risk-adjusted performance of hedge funds that follow a short-biased strategy. We use an approach to adjust for risk, and compute the abnormal returns of short-biased hedge funds. The study uses rollover regressions of blocks of 4 years worth of monthly observations, by updating the sample every 3 months over the January 2000 – December 2008 period. The article documents that the short-run short-biased alphas and appraisal ratios, respectively, deviate significantly over time from the long-run averages computed over the full sample. Using a panel approach, the article then investigates the sources of this time variation. Results in the article show that the causes are both market- (macro) and fund-related. Specifically, we find that the market-based factors affect significantly the time variation in the risk-adjusted returns, whereas the short-biased specific characteristics mainly determine the alphas’ volatility. However, neither the market-based nor the fund-specific factors appear to have much explanatory power concerning the variation in appraisal ratios.