Understanding Hedge Fund Performance

This article is the first of a two-part review of various micro (fund) and macro (strategy) factors that impact fund performance. In this part, the authors concentrate on reviewing some of the micro (e.g., fund level) elements driving fund performance. Specifically, they analyze the impact of fund characteristics such as survivor bias, age, and size on the fund's performance. In some cases, the results presented in this article seem to question previous results such as the impact of stale prices on return relationships, survivor bias, the use of historical hedge fund index data, and incentive fees. In other cases, the results support previous research on issues such as performance persistence, lock-ups, and a number of other micro/fund effects.

[1]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[2]  V. Agarwal,et al.  On Taking the “Alternative” Route , 2000 .

[3]  T. Schneeweis,et al.  Alternative Investments in the Institutional Portfolio , 2002 .

[4]  W. Fung,et al.  Asset-Based Style Factors for Hedge Funds , 2002 .

[5]  R. Spurgin,et al.  Skewness in Asset Returns , 1998 .

[6]  William N. Goetzmann,et al.  High Water Marks , 1998, Machinery.

[7]  Stephen E. Wilcox.  Offshore Hedge Funds: Survival and Performance, 1989–95 , 1999 .

[8]  Clifford S. Asness,et al.  Do Hedge Funds Hedge? , 2001 .

[9]  William N. Goetzmann,et al.  Survivorship Bias in Performance Studies , 1992 .

[10]  W. Fung,et al.  Survivorship Bias and Investment Style in the Returns of CTAs , 1997 .

[11]  W. Sharpe.  Asset allocation , 1992 .

[12]  Bing Liang.  Hedge Funds: The Living and the Dead , 2000, Journal of Financial and Quantitative Analysis.

[13]  Richard W. McEnally,et al.  The Performance of Hedge Funds: Risk, Return, and Incentives , 1999 .

[14]  T. Schneeweis.  Evidence of Superior Performance Persistence in Hedge Funds , 1998 .

[15]  Do Hedge Funds Disrupt Emerging Markets? , 2000 .

[16]  W. Warner,et al.  The Living and the Dead , 1960 .

[17]  Stephen J. Brown,et al.  Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and Ctas , 1997 .

[18]  David Hsieh,et al.  Benchmarks of Hedge Fund Performance: Information Content and Measurement Biases , 2001 .

[19]  N. Naik,et al.  On Taking the ‘ Alternative ' Route : Risks , Rewards and Performance Persistence of Hedge Funds Vikas , 1999 .

[20]  T. Schneeweis,et al.  Survivor bias in commodity trading advisor performance , 1996 .

[21]  David A. Hsieh,et al.  Measuring the market impact of hedge funds , 2000 .

[22]  W. Fung,et al.  A primer on hedge funds , 1999 .

[23]  Bing Liang,et al.  Hedge Fund Performance: 1990–1999 , 2001 .

[24]  David A. Hsieh,et al.  Hedge-Fund Benchmarks: Information Content and Biases , 2002 .

[25]  T. Schneeweis,et al.  The Benefits of Hedge Funds , 2001 .

[26]  T. Schneeweis,et al.  Multifactor Analysis of Hedge Fund, Managed Futures, and Mutual Fund Return and Risk Characteristics , 1998 .

[27]  W. Fung,et al.  The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers , 2001 .

[28]  Stephen M. Horan.  Multifactor Analysis of Hedge Fund, Managed Futures, and Mutual Fund Return and Risk Characteristics , 1999 .

[29]  Bing Liang.  On the Performance of Hedge Funds , 1998 .

[30]  Keith H. Black.  Understanding Hedge Fund Performance: Research Issues Revisited—Part II , 2003 .

[31]  Bing Liang,et al.  Hedge Fund Performance: 1990–1999 , 2001 .

[32]  R. Spurgin,et al.  A Review of Hedge Fund Performance Benchmarks , 1998 .

[33]  William N. Goetzmann,et al.  Hedge Funds with Style , 2003 .

[34]  David Hsieh,et al.  Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases , 2000, Journal of Financial and Quantitative Analysis.

[35]  Michael J. Howell.  Fund Age and Performance , 2001 .

[36]  W. Fung,et al.  Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds , 1997 .

[37]  J. D. Villiers,et al.  Managed Futures and Hedge Fund Investment for Downside Equity Risk Management , 1997 .

[38]  William N. Goetzmann,et al.  Offshore Hedge Funds: Survival and Performance 1989-1995 , 1997 .