'Smart Money?': The Trading Performance of Hedge Funds in a Zero-Sum Contest

46 Pages Posted: 17 Aug 2017

See all articles by Wei Lu

Wei Lu

The University of New South Wales; Commonwealth Bank of Australia - Realindex Investments

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: August 17, 2017

Abstract

This study makes an “apples-to-apples” comparison between hedge funds and all their counterparties, such as mutual funds’, in a zero-sum contest utilizing a new methodology. Extensive institutional transactions involving precisely matched trade portfolios shows that hedge funds are economically and statistically smarter traders gaining an internal rate of return of 8.36\% p.a. over the 11 years of our sample period at the expense of the equivalent negative return earned by their counterparties. The superior trading performance of hedge funds is reflected in their apparent bold contrarian trading strategy. It can be explained by their receipt of a daily private signal of fundamental value derived from the entire history of informed trades and prices, statistically rejecting the nested noisy partially revealing rational expectations equilibrium hypothesis.

Keywords: Hedge funds, Mutual funds, Calendar-time, Horizon-invariant, Trading performance

JEL Classification: G11, G12, G14

Suggested Citation

Lu, Wei and Swan, Peter Lawrence, 'Smart Money?': The Trading Performance of Hedge Funds in a Zero-Sum Contest (August 17, 2017). 30th Australasian Finance and Banking Conference 2017, Available at SSRN: https://ssrn.com/abstract=3020215

Wei Lu

The University of New South Wales ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Commonwealth Bank of Australia - Realindex Investments ( email )

Level 2, Darling Park Tower 1
201 Sussex Street
Sydney, NSW 2000
Australia

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

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

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

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