Do hedge fund investment strategies matter in hedge fund performance?

University essay from Umeå universitet/Handelshögskolan vid Umeå universitet; Umeå universitet/Handelshögskolan vid Umeå universitet

Author: Sarvar Samiev; Yaqian Wu; [2010]

Keywords: ;

Abstract:

Our study aims at analyzing the performance of 1455 live hedge funds in the chosen timeframe from 2004 and 2010. Our work is of great importance both forindividual and institutional investor which finds alternative investments as aninvestment choice. By decomposing hedge funds into different strategies we implementour analysis. To answer to our research question “Do hedge fund investing strategiesmatter in hedge fund performance?” our findings based on single and multipleregression models on risk-adjusted basis, show that different hedge investmentstrategies have different risk and return characteristics.Our multiple regression analysis in which we have included sub-category indices asfactor has provided the high R squared (99%). Managerial skill (alpha) is lower in caseof single regression using benchmarks compared to market (S&P 500), which isreasonable since our benchmark is homogenous funds included and measures theaverage performance of specific hedge fund sub category. The beta values in case ofbenchmark used is higher compared to market due to the same reason. The difference inR squared values is quite fluctuating. For some hedge funds, the explanatory power ofbenchmark is higher while for others is lower. We would like to emphasize that Rsquared values in case of market (S&P 500) are more stable compared to benchmark.H test showed that the differences existed among the performance of hedge fundinvestment strategies. LSD test showed that there are some strategies having significantdifferences on performance among different investment strategies. The multipleregression analysis using dummy variables showed that to some extent hedge fundstrategies matter on hedge fund performance. Risk-adjusted performance measuresshow the highest sharp ratio to PIPES (2,88) and Statistical Arbitrage (1,55).

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