Assessing the Performance of Funds of Hedge Funds

35 Pages Posted: 19 Sep 2011 Last revised: 30 Sep 2015

See all articles by Benoit Dewaele

Benoit Dewaele

Université Libre de Bruxelles (ULB)

Hugues Pirotte

Université Libre de Bruxelles - Solvay Brussels School of Economics and Management

Nils Tuchschmid

Tages Capital LLP

Erik Wallerstein

University of Applied Sciences Western Switzerland - Geneva School of Business Administration

Date Written: October 9, 2011

Abstract

This paper studies the performance of a sample of funds of hedge funds (FoHFs) from January 1994 to August 2009. We apply the false discoveries (FD) technique of Barras, Scaillet and Wermers (2010) to separate the FoHFs into skilled, zero-alpha and unskilled. We measure the alpha of the FoHFs using two models – (1) a 16-factor model with a combination of factors from Fung and Hsieh (2004) and Capocci, Corhay and Hübner (2005) and (2) a 13-factor model of hedge fund indices from Dow Jones Credit Suisse. Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. A series of robustness checks confirms the results of the FD procedure. We also compare the performance of our sample of FoHFs to artificial FoHFs constructed by randomly picking hedge funds. The lack of significant differences in the average performance of the real and artificial FoHFs confirms the results obtained by the FD procedure.

Keywords: Hedge funds, funds of funds, selection bias, abnormal returns, zero-alpha, skilled and unskilled performance, false discoveries

JEL Classification: G11, G15, C14

Suggested Citation

Dewaele, Benoit and Pirotte, Hugues and Tuchschmid, Nils and Wallerstein, Erik, Assessing the Performance of Funds of Hedge Funds (October 9, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1929097 or http://dx.doi.org/10.2139/ssrn.1929097

Benoit Dewaele

Université Libre de Bruxelles (ULB) ( email )

CP 132 Av FD Roosevelt 50
Brussels, Brussels 1050
Belgium

Hugues Pirotte (Contact Author)

Université Libre de Bruxelles - Solvay Brussels School of Economics and Management ( email )

50 Avenue Roosevelt
CP 145/01
Brussels 1050
Belgium
+32 2 650 65 21 (Phone)
+32 2 650 41 88 (Fax)

HOME PAGE: http://www.solvay.edu/cours/pirotte

Nils Tuchschmid

Tages Capital LLP ( email )

SW1Y 5NQ London
United Kingdom

Erik Wallerstein

University of Applied Sciences Western Switzerland - Geneva School of Business Administration ( email )

CH-1227 Geneva
Switzerland

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