Superstars or Average Joes? A Replication-Based Performance Evaluation of 1917 Individual Hedge Funds
Harry M. Kat
Helder P. Palaro
February 3, 2006
Alternative Investment Research Centre Working Paper No. 30
Cass Business School Research Paper
In this paper we use the hedge fund return replication technique recently introduced by Kat and Palaro (2005) to evaluate the net-of-fee performance of 1917 individual hedge funds. Comparing fund returns with the returns on dynamic futures trading strategies with the same risk and dependence characteristics, we find that no more than 17.7% of the hedge funds in our sample beat the benchmark. In other words, the majority of hedge funds have not provided their investors with returns, which they could not have generated themselves by mechanically trading S&P 500, T-bond and Eurodollar futures. Over time, we observe a substantial deterioration in overall hedge fund performance. In addition, we find a tendency for the performance of successful funds to deteriorate over time, which supports the hypothesis that increasing assets under management endanger future performance.
Number of Pages in PDF File: 30
Keywords: Hedge funds, performance evaluation, return replication
JEL Classification: G10, G13, G23working papers series
Date posted: February 7, 2006
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