Examining Hedge Fund Performance Holistically
By James LaDue
When do hedge funds deliver significant excess returns? When do young funds deliver higher alpha with respect to their peers?
Dimitrios Stafylas of Aston University Business School broke down hedge fund performance when approached holistically.
Stafylas’ considered fund specific characteristics, fund strategies, business cycles, and market conditions with a long U.S. dataset from 1990 to 2014, irrespective of the underlying fundamental factors.
This approach showed hedge funds delivered excess returns during “good” times and attempted to minimize their systematic risk during “bad” times.
Moreover, small funds delivered higher alpha during “good” times but suffered more than large funds during “bad” times.
“There is a classification and ranking (of) four different states of economic activity beginning from the most desirable state to the least desirable state,” the report says. “The focus is on North American due to the use of three full U.S. business cycles and the importance of this market, counting for $1.9 trillion of assets under management corresponding to almost 72% of the worldwide total of hedge funds.”
The report ultimately showed the relationship between funds’ performance and fund strategies within different business cycles and market conditions for a 360-degree view against the longest dataset of its kind.
There is an “association between specific fund characteristics (fundamental factors) and fund performance, and that funds’ exposures change over time,” the report argues. “… [These studies] are important for understanding hedge fund behav(ior); nevertheless, investors are still confused by hedge fund complexity as these associations are investigated on fundamental-only or strategy-only levels, without also examining their conditional changes over time.”
This study examined hedge funds that invest primarily in North American for more robust and concrete results.