The Effectiveness of Hedge Fund Investment Strategies under Various Market Conditions

Contemporary Economics (2020), Vol. 14 No. 2, pp. 127-143

17 Pages Posted: 21 Feb 2021

See all articles by Michał Falkowski

Michał Falkowski

Deutsche Bank

Agata Sierpińska-Sawicz

Poznan University of Economics

Piotr Szczepankowski

University of Finance and Management

Date Written: June 23, 2020

Abstract

The main purpose of the article was to analyze the effectiveness of the basic investment strategies used by hedge funds in the long term (years 1994-2015) and during the global financial crisis (years 2007-2009). Using information from commercial databases we attempted to verify the hypothesis that alternative hedge funds, regardless of the type of strategy they use, are capable of achieving better outcomes than other capital allocation options, at any time and under a variety of market conditions. We analyzed hedge funds effectiveness in two stages. For stage one, we performed a profitability analysis for the whole hedge funds sector in the two periods and compared the results with the stock rates of return achieved by investors in the global market for the same period and with the risk-free rate. At stage two we calculated ratios that included rate of return and risk, though only for specific strategies. We used traditional portfolio performance measures (Sharpe, Treynor, Jensen ratios) as well as the newer ones (the Sortino ratio, downside deviation). The results show no confirmation that investments carried out by hedge funds are more risky than traditional capital investment methods. Risk associated with investments by the analyzed entities was lower not only in times of prosperity, but also during crisis, providing a clear indication of the higher effectiveness of entities operating in the alternative investment sector and regardless of the changes taking place in the financial market, the length of the capital investment period or the investment strategy being pursued.

Keywords: hedge funds, efficiency, investment strategies, financial crisis

JEL Classification: G01, G20, G23, G32

Suggested Citation

Falkowski, Michał and Sierpińska-Sawicz, Agata and Szczepankowski, Piotr, The Effectiveness of Hedge Fund Investment Strategies under Various Market Conditions (June 23, 2020). Contemporary Economics (2020), Vol. 14 No. 2, pp. 127-143, Available at SSRN: https://ssrn.com/abstract=3732678

Michał Falkowski

Deutsche Bank ( email )

Agata Sierpińska-Sawicz (Contact Author)

Poznan University of Economics ( email )

Poznan, 60-967
Poland

Piotr Szczepankowski

University of Finance and Management ( email )

Pawia 55
Warsaw, 01-030
Poland

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