Evaluating hedge fund performance: a stochastic dominance approach

Sheng Li () and Oliver Bruce Linton ()

FMG Discussion Papers from Financial Markets Group

Abstract: We introduce a general and flexible framework for hedge fund performance evaluation and asset allocation: stochastic dominance (SD) theory. Our approach utilizes statistical tests for stochastic dominance to compare the returns of hedge funds. We form hedge fund portfolios by using SD criteria and examine the out-of-sample performance of these hedge fund portfolios. Compared to performance of portfolios of randomly selected hedge funds and mean-variance efficient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio.Keywords: Alpha; Mean Variance analysis; Portfolio; Risk Return

New Economics Papers: this item is included in nep-eff and nep-rmg
Date: 2007-07

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