Challenging Hedge Funds by Mimicking Their Strategies

Abstract

Since the launching of the first hedge fund, its ability to have a greater return with less volatility has attracted more and more people to get involved in this investment tool. Numbers of people either invest in hedge funds, or simply simulate the hedge fund strategy in order to obtain a higher return. This paper studies whether people can beat hedge funds by simply mimicking hedge funds strategies. The results are shown by comparing data from Goldman Sachs Hedge Industry VIP ETF, which stands for GVIP, and the long-short hedge fund index from November 2016 to July 2022. According to yahoo finance, GVIP seeks to invest 80% of its assets in its underlying index, depositary receipts representing securities included in its underlying index, and in underlying stocks in turns of depositary receipts included in its underlying index. First of all, the statistical return of GVIP and the long-short hedge fund index are analyzed in terms of their mean, standard deviation, and sharpe ratio. The number of months that GVIP outperforms hedge funds, and the maximum return gap are also concluded by using cross-sectional comparison. Secondly, some regressions are applied to obtain the preliminary conclusions of this paper. Thirdly, the FamaFrench five-factor model is applied to improve the accuracy of the model, so as to further analyze and verify the previous conclusions. Based on the statistical analysis, we can conclude that investors cannot beat hedge funds by mimicking their strategies.