FundCreator-Based Evaluation of Hedge Fund Performance
Alternative Investment Research Centre Working Paper No. 0040
39 Pages Posted: 21 Feb 2007
Date Written: February 22, 2007
In this paper we use the FundCreator hedge fund return replication technique recently introduced in Kat and Palaro (2005) to evaluate the net-of-fee performance of 875 funds of hedge funds and 2073 individual hedge funds, up to an including November 2006. Comparing fund returns with the returns on FundCreator-based dynamic futures trading strategies with the same risk and dependence characteristics, we find that no more than 18.6% of the funds of funds and 22.5% of the individual hedge funds in our sample convincingly beat the benchmark. In other words, the majority of hedge funds have not provided their investors with returns, which they could not have generated themselves by mechanically trading a diversified basket of liquid futures contracts. Over time, we observe a substantial deterioration in overall hedge fund performance. In addition, we find a tendency for the performance of successful funds to deteriorate over time. This supports the hypothesis that increased assets under management tend to endanger future performance.
Keywords: Hedge fund, fund of funds, performance evaluation, replication
JEL Classification: G14, G23
Suggested Citation: Suggested Citation