The Peer Performance Ratios of Hedge Funds

35 Pages Posted: 8 Feb 2012 Last revised: 4 Nov 2018

See all articles by David Ardia

David Ardia

University of Neuchatel - Institute of Financial Analysis

Kris Boudt

Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Date Written: December 22, 2015

Abstract

We define the outperformance (resp. underperformance) of an investment fund as the percentage of funds in the peer universe for which the true performance of the focal fund is higher (resp. lower). We show that the p-values of the pairwise tests of equal performance can be used to obtain estimates of the out- and underperformance ratio that are robust to false discoveries - estimated alpha differentials for which the significance test has a low p-value while the true alpha is identical. When applied to hedge funds, we find that ranking funds on the outperformance ratio leads to a top quintile portfolio with a higher absolute and risk-adjusted performance than when the estimated alpha is used.

Keywords: False discoveries, hedge fund, multiple hypothesis testing, peer performance, performance measurement

JEL Classification: C12, C21, C22

Suggested Citation

Ardia, David and Boudt, Kris, The Peer Performance Ratios of Hedge Funds (December 22, 2015). Journal of Banking and Finance, Vol. 87, pp. 351-368, 2018. Available at SSRN: https://ssrn.com/abstract=2000901 or http://dx.doi.org/10.2139/ssrn.2000901

David Ardia (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Rue A.-L. Breguet 2
Neuchatel, CH-2000
Switzerland

Kris Boudt

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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