Generalized runs tests to detect randomness in hedge funds returns

Rania Hentati-Kaffel and Philippe de Peretti
Authors registered in the RePEc Author Service: Rania HENTATI-KAFFEL

Journal of Banking & Finance, 2015, vol. 50, issue C, 608-615

Abstract: The major contribution of this paper is to make use of generalized runs tests (Cho and White, 2011) to analyze the randomness, i.e. the lack of persistence, in both absolute and relative returns of hedge funds. We find that about 42% of the HFR universe exhibit iid absolute returns over the period spanning 2000 to 2012. These funds are mainly found in proportions within the Macro and Equity Hedge strategies. A similar result holds for relative returns. We also find that funds having non-iid returns often exhibit ARCH effects and structural breaks, with largest breaks located within financial crises. Also, only a small percentage displays persistence in their relative performance, 8.2% to 16.7% of the universe, mainly found in proportions within the Relative Value and Event-Driven strategies. The robustness of results is challenged by implementing the tests on a crisis-free period. We find similar results for absolute returns. For relative ones, differences appear across strategies and benchmarks, but still both ARCH and breaks are present. Our work contributes to the hedge fund literature in terms of methodology, portfolio allocation, and performance measurement.

Keywords: Hedge funds; Randomness; Persistence; Generalized runs tests; ARCH; Breaks (search for similar items in EconPapers)
JEL-codes: C14 G14 G23 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:50:y:2015:i:c:p:608-615

DOI: 10.1016/j.jbankfin.2014.07.011

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