TESTING FOR RANDOM WALK AND STRUCTURAL BREAKS IN HEDGE FUNDS RETURNS

Mario Cerrato and Andrea Iannelli
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Andrea Iannelli: London Metropolitan University, Department of Economics, Finance and International Business, 84, Moorgate, London EC2M 6SQ, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2006, vol. 09, issue 03, 341-358

Abstract: We investigate the presence of managerial skills in different categories of hedge funds. Our approach is more flexible that others [7, 10] since it does not make any a priori assumptions regarding the distribution of returns. We find that the Global Macro and Market Neutral funds do not follow a pure random walk. In fact, for both these models the drift parameter is statistically significant. This result rejects our initial hypothesis that hedge funds (expected-excess) returns are on average zero. Indeed, the positive intercept can be interpreted as evidence of managerial skill. We conclude that investors seeking to invest in hedge funds should consider Market Neutral funds and Global Macro funds as possible investments.

Keywords: Hedge funds; unit root tests; structural breaks (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1142/S0219024906003615

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