For those interested in academic papers.... We used our technology of replication of hedge fund returns (see http://www.elitetrader.com/vb/showthread.php?s=&threadid=59983), to evaluate the performance of Hedge Funds in the following two papers: ************************************************* 1) Replication and Evaluation of Fund of Hedge Funds Returns http://papers.ssrn.com/sol3/papers.cfm?abstract_id=873465 In this paper we use the hedge fund return replication technique recently introduced in Kat and Palaro (2005) to evaluate the net-of-fee performance of 485 funds of hedge funds. The results indicate that the majority of funds of funds have not provided their investors with returns, which they could not have generated themselves by trading S&P 500, T-bond and Eurodollar futures. Purely in terms of returns therefore, most funds of hedge funds have failed to add value. ************************************************* 2) Superstars or Average Joes? A Replication-Based Performance Evaluation Of 1917 Individual Hedge Funds http://papers.ssrn.com/sol3/papers.cfm?abstract_id=881105 In this paper we use the hedge fund return replication technique recently introduced by Kat and Palaro (2005) to evaluate the net-of-fee performance of 1917 individual hedge funds. Comparing fund returns with the returns on dynamic futures trading strategies with the same risk and dependence characteristics, we find that no more than 17.7% of the hedge funds in our sample beat the benchmark. In other words, the majority of hedge funds have not provided their investors with returns, which they could not have generated themselves by mechanically trading S&P 500, T-bond and Eurodollar futures. Over time, we observe a substantial deterioration in overall hedge fund performance. In addition, we find a tendency for the performance of successful funds to deteriorate over time, which supports the hypothesis that increasing assets under management endanger future performance.
i think we already knew that in the hedge fund industry there are a few superstars and many net losers just in the game to try and collect the fees.
Helder, I just downloaded this paper (for the second time... I DL it also when you first posted it). I'll try working through it again, but would you mind explaining the method you use? From what I understand, you engineer the risk of a portfolio by adding/reducing bonds and or stocks. By increasing risk, you are also increasing returns and so on.. is this correct? Could this method be applied to many different instruments and therefore build a Fund of Funds with superior risk adjusted returns? Best, Granville
Hello Granville, Thanks for you interest. The method is based on dynamic trading, similar to the hedging of vanilla options. For example, you can hedge a call option trading the underlying asset and cash (readjusting periodically your portfolio according to the 'delta' of the option). In the same fashion, you can obtain the same returns distribution as the original fund trading some future contracts. So our objective is to obtain the same risk profile (volatility, skewness, kurtosis) and the same correlation with the investor's portfolio trading future contracts. After doing that, you will end up with the same risk in both the original fund and the replication strategy. Which one is the best? The one with the higher mean return. So funds with higher mean return than the replication strategy are labelled 'efficient' and the other way around they are labelled 'inefficient'. The evaluation paper showed that only 17.7% of the funds were efficient.