A study of the characteristics and performance of hegde funds
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In this thesis we have examined the characteristics and performance of hedge funds. This is done in light of the expected liberalisation of hedge fund regulations in Norway. Our analysis is mainly of foreign hedge fund indices, but also of a few individual Norwegian hedge funds for a shorter period. Hedge funds are known for superior mean-variance characteristics. At first glance they do indeed appear attractive. However, when taking into account the often disregarded higher moments of the return distribution, characteristics of negative skewness and positive excess kurtosis are revealed. This should be taken into consideration when evaluating hedge fund performance, since it indicates extreme values of return. It is noteworthy though, that in the shorter period of our analysis, these characteristics have been reduced considerably. The objective of hedge funds is positive return regardless of market movements, and they could therefore serve well for portfolio diversification purposes. Our studies reveal a low to moderate correlation with traditional assets, and it seems to be lower in bear markets. Our observations also tell us that hedge funds are sensitive to extreme market conditions. Autocorrelation can cause undervaluation of the volatility of hedge fund returns. The presence of first order autocorrelation among some hedge fund strategies is evident. Consequently, we found overestimation of risk-adjusted performance measures, and it also affected correlation. Among individual Norwegian hedge funds, autocorrelation seems absent. Literature on hedge funds often focuses on the limitations of traditional performance measures. Using both traditional and innovative performance measures we find that hedge funds, in spite of their characteristics, are ranked higher than traditional asset classes. We also find that the performance ranking of the traditional and innovative measures do not differ considerable from each other. However, there are several aspects of consideration when analyzing hedge funds. One of the major limitations of the research in this field is caused by the hedge funds’ complex nature and lack of transparency. The absence of reliable and accurate data makes it difficult to draw definite conclusions.
Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2008