Do Hedge Funds Outperform Stocks and Bonds?

44 Pages Posted: 10 May 2012 Last revised: 20 Dec 2012

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen J. Brown

New York University - Stern School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2012

Abstract

Hedge funds' extensive use of derivatives, short-selling, and leverage and their dynamic trading strategies create significant non-normalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge fund portfolios. This paper uses the utility-based nonparametric approach of Levy and Leshno (2002) and the utility-based parametric measure of Goetzmann, Ingersoll, Spiegel, and Welch (2007) to determine which hedge fund strategies outperform the U.S. equity and/or bond markets. The results from the realized and simulated return distributions indicate that the Long/Short Equity Hedge and Emerging Markets hedge fund strategies outperform the U.S. equity market, and the Long/Short Equity Hedge, Multi-strategy, Managed Futures, and Global Macro hedge fund strategies dominate the U.S. Treasury market.

Keywords: Hedge Funds, Stocks, Bonds, Almost Stochastic Dominance, and MPPM

JEL Classification: G10, G11, G12

Suggested Citation

Bali, Turan G. and Brown, Stephen J. and Demirtas, K. Ozgur, Do Hedge Funds Outperform Stocks and Bonds? (September 20, 2012). Available at SSRN: https://ssrn.com/abstract=2055507 or http://dx.doi.org/10.2139/ssrn.2055507

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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Stephen J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
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K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

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