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On Taking the 'Alternative' Route: Risks, Rewards, Style and Performance Persistence of Hedge Funds

39 Pages Posted: 25 Feb 1999  

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: February, 1999

Abstract

Using a new database of hedge funds, this paper provides a comprehensive analysis of the risk-return characteristics, risk exposures, style analysis and performance persistence of various hedge fund strategies. We conduct a mean-variance analysis to find that a combination of alternative investments and passive indexing provides significantly better risk-return tradeoff than passively investing in the different asset classes. Using a broad asset class factor model, we find that the hedge fund strategies outperform the benchmark by a range of 6% to 15% per year. We infer the significant risk exposures of different hedge fund strategies using generalized style analysis and find results consistent with their investment objectives. Finally, using parametric and non-parametric methods, we examine persistence in the performance of hedge fund managers. We find a reasonable degree of persistence which seems to be attributable more to the losers continuing to be losers instead of winners continuing to be winners.

JEL Classification: G11, G15, G24

Suggested Citation

Agarwal, Vikas and Naik, Narayan Y., On Taking the 'Alternative' Route: Risks, Rewards, Style and Performance Persistence of Hedge Funds (February, 1999). Available at SSRN: https://ssrn.com/abstract=150388 or http://dx.doi.org/10.2139/ssrn.150388

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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