Nonparametric Assessment of Hedge Fund Performance

62 Pages Posted: 8 Aug 2013 Last revised: 1 Jun 2021

See all articles by Caio Almeida

Caio Almeida

Princeton University

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

René Garcia

Université de Montréal ; Toulouse School of Economics

Date Written: August 12, 2019


We propose a new class of performance measures for Hedge Fund (HF) returns based on a family of empirically identifiable stochastic discount factors (SDFs). The SDF-based measures incorporate no-arbitrage pricing restrictions and naturally embed information about higher-order mixed moments between HF and benchmark factors returns. We provide full asymptotic theory for our SDF estimators to test for the statistical significance of each fund's performance and for the relevance of individual benchmark factors within each proposed measure. We apply our methodology to a panel of 4815 individual hedge funds. Our empirical analysis reveals that fewer funds have a statistically significant positive alpha compared to the Jensen's alpha obtained by the traditional linear regression approach. Moreover, the funds' rankings vary considerably between the two approaches. Performance also varies between the members of our family because of a different fund exposure to higher-order moments of the benchmark factors, highlighting the potential heterogeneity across investors in evaluating performance.

Keywords: Stochastic Discount Factors, Performance Measurement, Minimum Discrepancy measures, Nonparametric discounting

JEL Classification: C1, C5, G1

Suggested Citation

Almeida, Caio and Ardison, Kym and Garcia, René, Nonparametric Assessment of Hedge Fund Performance (August 12, 2019). Journal of Econometrics, Vol. 214, No. 2, 2020, Available at SSRN: or

Caio Almeida (Contact Author)

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900

René Garcia

Université de Montréal ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
514-7018807 (Phone)

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Toulouse School of Economics ( email )


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