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Global Hedge Funds: Risk, Return, and Market Timing

Posted: 26 Mar 2003  

Hung-Gay Fung

University of Missouri at Saint Louis - College of Business Administration

Xiaoqing Eleanor Xu

Seton Hall University

Jot Yau

Seattle University

Abstract

We examined the performance of 115 global equity-based hedge funds with reference to their target geographical markets in the seven-year period 1994-2000. Several results are noteworthy. First, global hedge fund managers do not show positive market-timing ability but do demonstrate superior security-selection ability; the Jensen's alphas we found, before and after controlling for market timing, are sizable and positive. Second, incentive fees and leverage both have a significant positive impact on a hedge fund's risk-adjusted return (as demonstrated by Sharpe ratios and Jensen's alphas) but not on a fund's "selectivity index" (i.e., its performance after controlling for market-timing effects). Third, incentive fees can lower the hedge fund's up-market and down-market systematic risk. Fourth, the size of a hedge fund is consistently related to its return performance. Finally, contrary to the general perception, leverage does not significantly affect the systematic risk of hedge funds.

Keywords: Alternative Investments: Hedge funds, Performance Measurement and evaluation: Performance measurement

Suggested Citation

Fung, Hung-Gay and Xu, Xiaoqing Eleanor and Yau, Jot, Global Hedge Funds: Risk, Return, and Market Timing. Financial Analysts Journal, Vol. 58, No. 6, November/December 2002. Available at SSRN: https://ssrn.com/abstract=377460

Hung-Gay Fung (Contact Author)

University of Missouri at Saint Louis - College of Business Administration ( email )

One University Blvd.
487 SSB
St. Louis, MO 63121
United States
314-516-6374 (Phone)

Xiaoqing Eleanor Xu

Seton Hall University ( email )

Department of Finance, Stillman School of Business
400 South Orange Avenue
South Orange, NJ 07079
United States
973-761-9209 (Phone)
973-961-9217 (Fax)

Jot Yau

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

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