The alpha and omega of fund of hedge fund added value

Serge Darolles () and Mathieu Vaissié
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Serge Darolles: DRM-Finance - DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Mathieu Vaissié: EDHEC-Risk Institute - EDHEC - EDHEC Business School - UCL - Université catholique de Lille

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Abstract: In spite of a somewhat disappointing performance throughout the crisis, investors are showing interest in hedge funds. Still, funds of hedge funds keep on experiencing outflows. Can this phenomenon be explained by the failure of fund of hedge fund managers to deliver on their promise to add value through active management, or is it symptomatic of a move toward greater disintermediation in the hedge fund industry? We introduce a return-based attribution model allowing for a full decomposition of fund of hedge fund performance. The results of our empirical study suggest that funds of hedge funds are funds of funds like others. Strategic allocation turns out to be a crucial step in the investment process, in that it not only adds value over the long-term, but most importantly, it brings resilience precisely when investors need it the most. Fund picking, on the other hand, turns out to be a double-edged sword.

Keywords: Funds of hedge funds; Performance attribution model; Strategic allocation; Active management; Kalman filter (search for similar items in EconPapers)
Date: 2012-04-01
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Citations: View citations in EconPapers (5)

Published in Journal of Banking and Finance, 2012, 36 (4), pp.1067-1078. ⟨10.1016/j.jbankfin.2011.10.021⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00677718

DOI: 10.1016/j.jbankfin.2011.10.021

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