Evaluating hedge fund performance: a stochastic dominance approach

Sheng Li and Oliver Linton

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 e¢ cient 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 (search for similar items in EconPapers)
JEL-codes: G00 G11 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Evaluating hedge fund performance: a stochastic dominance approach (2007)
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