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On the Performance of Hedge Funds

Bing Liang

University of Massachusetts Amherst - Department of Finance

May 1998

This paper investigates hedge fund performance and risk. The empirical evidence indicates that hedge funds differ substantially from traditional investment vehicles such as mutual funds. The funds with watermarks significantly outperform the funds without watermarks. The average hedge fund returns are related positively to incentive fees, the size of the fund, and the lockup period. Hedge funds follow dynamic trading strategies and have low systematic risk. There are low correlations among different strategies. Compared with mutual funds, hedge funds offer better risk-return trade-offs: they have higher Sharpe ratios, lower market risks, and higher abnormal returns. In the period of January 1994 to December 1996, hedge funds provide positive abnormal returns. Overall, hedge fund strategies dominate mutual fund strategies, hence hedge funds provide a more efficient investment opportunity set for investors.

Number of Pages in PDF File: 41

JEL Classification: G23, G11

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Date posted: June 17, 1998  

Suggested Citation

Liang, Bing, On the Performance of Hedge Funds (May 1998). Available at SSRN: https://ssrn.com/abstract=89490 or http://dx.doi.org/10.2139/ssrn.89490

Contact Information

Bing Liang (Contact Author)
University of Massachusetts Amherst - Department of Finance ( email )
Amherst, MA 01003
United States
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