56 Pages Posted: 20 Apr 2012 Last revised: 1 Aug 2014
Date Written: July 22, 2014
To understand the nature of hedge fund managers’ skills, we study the implementation of risk arbitrage by hedge funds using their portfolio holdings and comparing them with those of other institutional arbitrageurs. We find that hedge funds significantly outperform a naive risk arbitrage portfolio by 3.7% annually on a risk-adjusted basis, while non-hedge fund arbitrageurs fail to outperform the benchmark. Our analysis reveals that hedge funds’ superior performance does not reflect fund managers’ ability to predict or affect the outcome of merger and acquisition deals; rather, hedge fund managers’ superior performance is attributed to their ability to manage downside risk.
Keywords: Hedge funds, hedge fund holdings, performance evaluation, risk arbitrage strategy
JEL Classification: G11, G23
Suggested Citation: Suggested Citation
Cao, Charles and Goldie, Bradley A. and Liang, Bing and Petrasek, Lubomir, What Is the Nature of Hedge Fund Manager Skills? Evidence from the Risk Arbitrage Strategy (July 22, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2042744 or http://dx.doi.org/10.2139/ssrn.2042744