Generalized runs tests to detect randomness in hedge funds returns

Rania Hentati () and Philippe de Peretti ()
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Rania Hentati: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Philippe de Peretti: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

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)
Date: 2015-08-08
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Citations: View citations in EconPapers (4)

Published in Journal of Banking and Finance, 2015, 50, pp.608-615. ⟨10.1016/j.jbankfin.2014.07.011⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01299827

DOI: 10.1016/j.jbankfin.2014.07.011

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