Evaluating the Performance of Hedge Funds Using Two-Stage Peer Group Benchmarks

34 Pages Posted: 18 Jul 2014

See all articles by Marco Wilkens

Marco Wilkens

University of Augsburg

Juan Yao

University of Sydney - Business School - Finance Discipline; Financial Research Network (FIRN)

Nagaratnam Jeyasreedharan

University of Tasmania; Financial Research Network (FIRN)

Patrick Boehler

University of Augsburg

Date Written: April 16, 2014

Abstract

This paper is the first to present a two-stage peer group benchmarking approach to evaluate the performance of hedge funds. We present different ways of orthogonalizing the peer group benchmarks and discuss their general properties. We then orthogonalize the relevant benchmarks against predetermined exogenous factors. For a broad dataset we show that this approach captures much more commonalities in hedge funds returns when compared to the standard methodology of using exogenous factors only. As a consequence, the empirical rankings of hedge funds on the basis of alphas change considerably. Therefore, the proposed two-stage peer group benchmark allows us to better determine which hedge fund managers outperformed the others in the past.

Keywords: Hedge Funds, Performance Measurement, Factor Models, Peer Group Benchmarks

JEL Classification: G11, G12, G15

Suggested Citation

Wilkens, Marco and Yao, Juan and Jeyasreedharan, Nagaratnam and Boehler, Patrick, Evaluating the Performance of Hedge Funds Using Two-Stage Peer Group Benchmarks (April 16, 2014). Available at SSRN: https://ssrn.com/abstract=2467361 or http://dx.doi.org/10.2139/ssrn.2467361

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

Juan Yao (Contact Author)

University of Sydney - Business School - Finance Discipline ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 93517650 (Phone)
+61 2 9351 6461 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Nagaratnam Jeyasreedharan

University of Tasmania ( email )

Private Bag 85
Hobart, Tasmania 7001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Patrick Boehler

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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