Hedge Fund Risk Dynamics: Implications for Performance Appraisal

Accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes, strategies, and leverage in response to changing market conditions and arbitrage opportunities. The standard measure of performance is the abnormal return defined by a hedge fund's e...

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Bibliographic Details
Published in:The Journal of finance (New York) 2009-04, Vol.64 (2), p.985-1035
Main Authors: BOLLEN, NICOLAS P.B., WHALEY, ROBERT E.
Format: Article
Language:English
Subjects:
Abnormal returns
Arbitrage
Critical values
Fees
Fund management
Futures contracts
Hedge funds
Hedging
Investment risk
Investment trusts
Modeling
Mutual funds
Null hypothesis
Parametric models
Performance appraisal
Portfolio management
Regression analysis
Risk factors
Risk management
Stochastic models
Studies
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Summary:Accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes, strategies, and leverage in response to changing market conditions and arbitrage opportunities. The standard measure of performance is the abnormal return defined by a hedge fund's exposure to risk factors. If exposures are assumed constant when, in fact, they vary through time, estimated abnormal returns may be incorrect. We employ an optimal changepoint regression that allows risk exposures to shift, and illustrate the impact on performance appraisal using a sample of live and dead funds during the period January 1994 through December 2005.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2009.01455.x