Nonparametric Assessment of Hedge Fund Performance
Kim Ardison and
René Garcia ()
No 19-1024, TSE Working Papers from Toulouse School of Economics (TSE)
We propose a new class of performance measures for Hedge Fund (HF) returns based on a family of empirically identiable stochastic discount factors (SDFs). The SDF-based measures incorporate no-arbitrage pricing restrictions and naturally embed information about higher-order mixed moments between HF and benchmark factors returns. We provide a full asymptotic theory for our SDF estimators to test for the statistical signicance of each fund's performance and for the relevance of individual benchmark factors within each proposed measure. We apply our methodology to a panel of 4815 individual hedge funds. Our empirical analysis reveals that fewer funds have a statistically signicant positive alpha compared to the Jensen's alpha obtained by the traditional linear regression approach. Moreover, the funds' rankings vary considerably between the two approaches. Performance also varies between the members of our family because of a dierent fund exposure to higherorder moments of the benchmark factors, highlighting the potential heterogeneity across investors in evaluating performance.
Keywords: Hedge Funds; Admissible Performance Measures; Nonparametric Estimation; Higher-order Moments (search for similar items in EconPapers)
JEL-codes: G12 G13 C14 C58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ore and nep-rmg
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