Major Hedge Fund Research Articles

Hedge Fund Benchmarks: A Risk-Based Approach

Following a review of the data and methodological difficulties in applying conventional models used for traditional asset class indexes to hedge funds, this article argues against the conventional approach. Instead, in an extension of previous work on asset-based style (ABS) factors, the article proposes a model of hedge fund returns that is similar to models based on arbitrage pricing theory, with dynamic risk-factor coefficients. For diversified hedge fund portfolios (as proxied by indexes of hedge funds and funds of hedge funds), the seven ABS factors can explain up to 80 percent of monthly return variations. Because ABS factors are directly observable from market prices, this model provides a standardized framework for identifying differences among major hedge fund indexes that is free of the biases inherent in hedge fund databases.

Performances of Hedge Funds and Standard Assets: A Systematic Investigation

In the last decade, the performances of hedge funds were surprisingly satisfactory and recurrent. However, the bankruptcy of LTCM reminded investors of the risks associated with this asset class. The purpose of this study is to analyse systematically the relationship between the performances of hedge funds' strategies and those of standard asset classes via facto r models. As in the existing literature, we open the scope of the factors drawn upon to non-conventional measures such as performance spread or payoff of options on a standard asset class. Furthermore, we add other non-conventional measurements that aim to quantify, inter alia, the intensity of trends, the opportunities generated by range trading or arbitrage operations between various assets or the role of the heterogeneity of individual performances in the stock markets. We highlight the strategies that present a simple exposure to standard assets, those for which this exposure is combined with more complex exposures (notably non-linear/optional ones) and those, lastly, for which it is very difficult to reproduce performances. We notably present a synthetic transition matrix that allows us to link a relatively standard financial scenario and an allocation within major hedge funds' strategies (while giving a degree of confidence about the various strategies). Moreover, we illustrate the importance of extreme risk in hedge funds' strategies. In particular, we will show that once conditioned on usual or normal risk, several strategies present a substantial risk of extreme loss relative to standard asset classes. We analyse the impact of these results for the management of hedge funds in a prospect of asset allocation. We show as well that allocations based on standard measurements of risk (of the variance type) lead to non-optimal portfolios given the risk of extreme loss and suggest other measurements of risk that could be substituted. We then show the attractiveness in terms of return-to-risk ratio of inserting hedge funds into a standard asset portfolio, notably when a high enough individual degree of risk diversification by hedge funds has been achieved by blending strategies (funds of funds).

Hedge Funds: The Living and the Dead

In this paper, I examine survivorship bias in hedge fund returns by comparing two large databases. I find that the survivorship bias exceeds 2% per year. Results of survivorship bias by investment styles indicate that the biases are different across styles. I reconcile the conflicting results about survivorship bias in previous studies by showing that the two major hedge fund databases contain different amounts of dissolved funds. Empirical results show that poor performance is the main reason for a fund's disappearance. Furthermore, I find that there are significant differences in fund returns, inception date, net assets value, incentive fee, management fee, and investment styles for the 465 common funds covered by both databases. Mismatching between reported returns and the percentage changes in NAVs can partially explain the differences in returns.

Hedge Funds: The Living and the Dead

In this paper, we examine survivorship bias in hedge fund returns by comparing two large databases. We find that the survivorship bias exceeds 2% per year. We reconcile the conflicting results about survivorship bias in previous studies by showing that the two major hedge fund databases contain different amounts of dissolved funds. Empirical results show that poor performance is the main reason for a fund?s disappearance. Furthermore, we find that there are significant differences in fund returns, inception date, net assets value, incentive fee, management fee, and investment styles for the 465 common funds covered by both databases. One database has more return and NAV observations, longer fund return history, and more funds with fee information than the other database. There are at least 5% return numbers and 5% NAV numbers which differ dramatically across the two databases. Mismatching between reported returns and the percentage changes in NAVs can partially explain the difference. The two databases also have different style classifications. Results of survivorship bias by styles indicate that the biases are different across styles and significant for ten out of fifteen styles in one database but none is significant for the other one.