Hedge Funds, Fund Attributes and Risk Adjusted Returns

28 Pages Posted: 29 Jul 2011 Last revised: 1 Aug 2011

See all articles by Gokce Soydemir

Gokce Soydemir

California State University, Stanislaus

Jan Smolarski

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business Administration

Sangheon Shin

Alabama State University

Date Written: September 15, 2010

Abstract

We use proprietary data to examine factors that lead hedge fund managers to offer hurdle rates and investigate relative hedge fund performance based on risk adjusted returns. Using data from 3,571 hedge funds over a 15 year period, we find that funds that do not offer a hurdle rate outperform those that do. Funds offering a high watermark charge substantially higher performance fees. Further, emerging market, fixed income, and funds of funds are significantly more likely to offer a hurdle rate than other types of funds. Performance fees have a positive impact on the likelihood of offering a hurdle rate. Fund leverage and management fees are negatively associated with hurdle rates. The cross-sectional regressions show that funds, which offer a high watermark, underperform those that do not. Funds that charge a high performance fee appear to outperform those that charge a relatively low fee. The results are consistent with the view that those managers who wish to improve risk adjusted returns should not focus on hurdle rates.

Keywords: Hedge Funds, Hurdle Rates, High-Watermarks

JEL Classification: G11, G24

Suggested Citation

Soydemir, Gokce and Smolarski, Jan and Shin, Sangheon, Hedge Funds, Fund Attributes and Risk Adjusted Returns (September 15, 2010). Available at SSRN: https://ssrn.com/abstract=1896524 or http://dx.doi.org/10.2139/ssrn.1896524

Gokce Soydemir

California State University, Stanislaus ( email )

Turlock, CA 95382
United States

Jan Smolarski

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business Administration ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

Sangheon Shin (Contact Author)

Alabama State University ( email )

P.O. Box 271
Montgomery, AL 36101-0271
United States
334-229-6831 (Phone)

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