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The absolute returns of hedge funds

The absolute returns of hedge funds Purpose – The purpose of this paper is to examine the ability of hedge funds and funds of hedge funds to generate absolute returns using fund level data. Design/methodology/approach – The absolute return profiles are identified using properties of the empirical distributions of fund returns. The authors use both Bayesian multinomial probit and frequentist multinomial logit regressions to examine the relationship between the return profiles and fund characteristics. Findings – Some evidence is found that only some hedge funds strategies, but not all of them, demonstrate higher tendency to produce absolute returns. Also identified are some investment provisions and fund characteristics that can influence the chance of generating absolute returns. Finally, no evidence was found for performance persistence in terms of absolute returns for hedge funds but some limited evidence for funds of funds. Practical implications – This paper is the first attempt to examine the hedge fund return profiles based on the notion of absolute return in great details. Investors and managers of funds of funds can utilize the identification method in this paper to evaluate the performance of their interested hedge funds from a new angle. Originality/value – Using the properties of the empirical distribution of the hedge fund returns to classify them into different absolute return profiles is the unique contribution of this paper. The application of the multinomial probit and multinomial logit models in the fund performance and fund characteristics literature is also new since the dependent variable in the authors' regressions is multinomial. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

The absolute returns of hedge funds

Managerial Finance , Volume 38 (3): 23 – Feb 17, 2012

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References (66)

Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074351211201424
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the ability of hedge funds and funds of hedge funds to generate absolute returns using fund level data. Design/methodology/approach – The absolute return profiles are identified using properties of the empirical distributions of fund returns. The authors use both Bayesian multinomial probit and frequentist multinomial logit regressions to examine the relationship between the return profiles and fund characteristics. Findings – Some evidence is found that only some hedge funds strategies, but not all of them, demonstrate higher tendency to produce absolute returns. Also identified are some investment provisions and fund characteristics that can influence the chance of generating absolute returns. Finally, no evidence was found for performance persistence in terms of absolute returns for hedge funds but some limited evidence for funds of funds. Practical implications – This paper is the first attempt to examine the hedge fund return profiles based on the notion of absolute return in great details. Investors and managers of funds of funds can utilize the identification method in this paper to evaluate the performance of their interested hedge funds from a new angle. Originality/value – Using the properties of the empirical distribution of the hedge fund returns to classify them into different absolute return profiles is the unique contribution of this paper. The application of the multinomial probit and multinomial logit models in the fund performance and fund characteristics literature is also new since the dependent variable in the authors' regressions is multinomial.

Journal

Managerial FinanceEmerald Publishing

Published: Feb 17, 2012

Keywords: Hedge funds; Absolute returns; Hedge fund strategies; Performance persistence; Performance measurement; Financial institutions; Portfolio investment; Quantitative techniques

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