Are Funds of Hedge Funds Efficient? An Empirical Analysis for North American, Asia Pacific, and European Long/Short Funds of Hedge Funds

Lan T.P. Nguyen (), Malick O. Sy, Cheng M. Yu, Sayed Hossain and Tan B. Chen
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Lan T.P. Nguyen: Multinational University, Malaysia
Malick O. Sy: Royal Melbourne Institute of Technology (RMIT), Australia
Cheng M. Yu: Universiti Tunku Abdul Rahman (UTAR), Malaysia
Sayed Hossain: Cedar Valley College, USA
Tan B. Chen: Multimedia University, Malaysia

Multinational Finance Journal, 2019, vol. 23, issue 1-2, 37-64

Abstract: This study aims to examine whether long/short funds of hedge funds truly provide better diversification benefits to hedge fund investors as compared to efficient portfolios of long/short hedge funds in North America, Europe, and Asia Pacific. Data of long/short hedge funds and long/short FOHFs are obtained from Eurekahedge databases from 1st January 2008 to 31st December 2016. Mean-variance optimization method is employed to construct efficient portfolios of 100 long/short hedge funds with highest Sharpe ratios for each of the selected regions. To ensure the robustness of our findings, two rolling windows of observation are set up for a comparative analysis. This study concludes that most of the single-region focused long/short FOHFs in the sample, did not outperform the constructed efficient portfolios of long/short hedge funds investing in the same region. In fact, many long/short FOHFs did not survive more than a period of six years as observed in this study.

Keywords: funds of hedge funds; long/short strategy; diversification; efficient portfolios; mean-variance method (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2019
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