Measuring the performance of hedge funds using two-stage peer group benchmarks

Marco Wilkens (), Juan Yao (), Nagaratnam Jeyasreedharan () and Patrick Oehler ()
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Marco Wilkens: Chair of Finance and Banking, University of Augsburg
Juan Yao: Finance Discipline, Business School, University of Sydney
Nagaratnam Jeyasreedharan: School of Economics and Finance, University of Tasmania, http://www.utas.edu.au/economics-finance/
Patrick Oehler: University of Augsburg

No 2013-18, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper is the first to present a two-stage peer group benchmarking approach to evaluate the performance of hedge funds. We present different ways of orthogonalizing the peer group benchark and discuss their propperties in general. We propose to orthogonalize the benchmark against all other exogenous factors. For a broad dataset we show that this approach captures much more commonalities in hedge funds returns compared to the standard methodology if only classical exogenous factors are used. As a result the empirical rankings of hedge funds on the basis of alphas received by this new approach change heavily. Therefore, the proposed two-stage peer group benchmark allows us to better determine which hedge fund managers outperformed the others in the past.

Keywords: Hedge Funds; Performance Measurement; Factor Model; Peer Group Benchmark. (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-06-01, Revised 2013-06-01
New Economics Papers: this item is included in nep-eff
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Published by the University of Tasmania. Discussion paper series N 2013-18

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