Characteristics of Hedge Fund Performance - Sources of Risk-Return Properties -

Tomohiro Miura, Yoshinori Tetsuda and Tokiko Shimizu
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Tomohiro Miura: Bank of Japan
Yoshinori Tetsuda: Bank of Japan
Tokiko Shimizu: Bank of Japan

No 06-E-2, Bank of Japan Review Series from Bank of Japan

Abstract: With the lowering volatilities in the foreign exchange and stock markets in recent years and historically low interest rates, investments in hedge funds and investment trusts (Japanese mutual funds) by Japanese investors have been increasing. For both hedge funds and investment trusts, investors subcontract asset management to investment managers by paying a management fee. It is pointed out that hedge funds, compared to publicly offered investment trusts, generally have less information disclosure and may have risk characteristics which are difficult to comprehend. On the other hand, investors can, by investing in hedge funds, seek returns that are not subject to fluctuations in market benchmarks. Such characteristics of hedge fund investments are realized through a highly free environment for investment managers. But from the perspective that investors bear risks, not embedded in investment trusts, such as liquidity constraints, liquidation risks, etc., there is a trade-off between risk and return. The reasons behind hedge funds securing positive returns since year 2000 regardless of fluctuations in benchmarks may have been derived from an investment policy aiming for "absolute returns" and less investment constraints.

Date: 2006-03
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