Performance Measurement of Hedge Funds Using Data Envelopment Analysis
Financial Markets and Portfolio Management, Vol. 20, No. 4, 2006
29 Pages Posted: 10 Nov 2006
Abstract
Data envelopment analysis (DEA) is a nonparametric method from the area of operations research that measures the relationship of produced outputs to assigned inputs and determines an efficiency score. This efficiency score can be interpreted as a performance measure in investment analysis. Recent literature contains intensive discussion of using DEA to measure the performance of hedge funds, as this approach yields some advantages compared to classic performance measures. This paper extends the current discussion in three aspects. First, we present different DEA models and analyze their suitability for hedge fund performance measurement. Second, we systematize possible inputs and outputs for DEA and again examine their suitability for hedge fund performance measurement. Third, two rules are developed to select inputs and outputs in DEA of hedge funds. Using this framework, we find a completely new ranking of hedge funds compared to classic performance measures and compared to previously proposed DEA applications. Thus, we propose that classic performance measures should be supplemented with DEA based on the suggested rules to fully capture hedge fund risk and return characteristics.
Keywords: Data Envelopment Analysis, Performance Measurement, Hedge Funds
JEL Classification: G10, G11, G23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Characteristics of Risk and Return in Risk Arbitrage
By Mark L. Mitchell and Todd C. Pulvino
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By William N. Goetzmann, Roger G. Ibbotson, ...
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
Hedge Funds: The Living and the Dead
By Bing Liang
-
Flows, Performance, and Managerial Incentives in Hedge Funds
By Vikas Agarwal, Naveen D. Daniel, ...