Hedge Fund Performance 1990-2000: Do the Money Machines Really Add Value?

39 Pages Posted: 23 May 2001

See all articles by Harry M. Kat

Harry M. Kat


Gaurav S. Amin

Albourne Partners; University of Reading - ICMA Centre

Date Written: May 15, 2001


In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990-April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds

JEL Classification: G1, G2

Suggested Citation

Kat, Harry M. and Amin, Gaurav S., Hedge Fund Performance 1990-2000: Do the Money Machines Really Add Value? (May 15, 2001). EFMA 2001 Lugano Meetings, Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=270074 or http://dx.doi.org/10.2139/ssrn.270074

Gaurav S. Amin

Albourne Partners ( email )

16 Palace Street
London, SW1E 5JD
United Kingdom
02073467000 (Phone)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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