Hedge Fund Indices: Performance and Comovement

Abstract

The purpose of this paper is to examine the performance of different hedge fund investment strategies, with emphasis on the US financial crisis of 2007–2009. Additionally, the paper aims to examine the return comovement of hedge fund indices and the return comovement between hedge fund indices and equity indices. On evaluating the performance of 26 HFRI indices, the paper finds three hedge fund indices namely: ED: Merger Arbitrage Index, HFRI Relative Value (Total) Index and RV: Fixed Income-Asset Backed Index, which managed to beat the benchmark and the category during the pre-crisis period, crisis period and the post-crisis period. In light of US financial crisis, it finds that only four hedge fund indices recorded positive Sharpe ratios. Using coefficient of determination, the paper concludes that hedge fund indices do not have high return correlations with equity indices.