Hedge Fund Performance 1990-2000- Do the "Money Machines" Really Add Value?

Gaurav Amin () and Harry Kat
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Gaurav Amin: ICMA Centre, University of Reading

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 - April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.

Keywords: Hedge Fund; Efficiency; Risk and Return (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2001-01, Revised 2001-09
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Citations: View citations in EconPapers (3)

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Journal Article: Hedge Fund Performance 1990–2000: Do the “Money Machines” Really Add Value? (2003)
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