Hedge Fund Performance Attribution at Fundamental and Mixed Level Under Different Market Conditions

Abstract

This paper examines hedge fund performance in a holistic approach taking into consideration fund specific characteristics, fund strategies, and both business cycles and different market conditions using a long U.S. dataset form 1990 to 2014. Using our proposed agile model we found, first, that irrespective of the underlying fundamental factors, hedge funds, on average, deliver significant excess returns to investors, only during “good” times contrary to “bad” times that they try to minimize their systematic risk. Secondly, during “good” times, small funds, young funds and funds with redemption restrictions deliver higher alpha with respect to their peers; however, during “bad” times small funds suffer more than large, young funds continue to outperform old ones, and funds that do not impose restrictions (and survive) outperform funds with lockups. Third, at the mixed level, there are strategies with specific characteristics that deliver significant negative alpha to investors, conditional on stressful market conditions.