39 Pages Posted: 25 Feb 1999
Date Written: February, 1999
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: 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
By Bing Liang