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Do Hedge Funds Outperform Stocks and Bonds?

Author

Listed:
  • Turan G. Bali

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Stephen J. Brown

    (Leonard N. Stern School of Business, New York University, New York, New York 10012; and University of Melbourne, Parkville 3010, Victoria, Australia)

  • K. Ozgur Demirtas

    (Finance at the School of Management, Sabanci University, Orhanli, Tuzla 34956, Istanbul, Turkey)

Abstract

Hedge funds' extensive use of derivatives, short selling, and leverage and their dynamic trading strategies create significant nonnormalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge fund portfolios. This paper uses the utility-based nonparametric and parametric performance measures to determine which hedge fund strategies outperform the U.S. equity and/or bond markets. The results from the realized and simulated return distributions indicate that the long/short equity hedge and emerging markets hedge fund strategies outperform the U.S. equity market, and the long/short equity hedge, multistrategy, managed futures, and global macro hedge fund strategies dominate the U.S. Treasury market. This paper was accepted by Wei Jiang, finance.

Suggested Citation

  • Turan G. Bali & Stephen J. Brown & K. Ozgur Demirtas, 2013. "Do Hedge Funds Outperform Stocks and Bonds?," Management Science, INFORMS, vol. 59(8), pages 1887-1903, August.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:8:p:1887-1903
    DOI: 10.1287/mnsc.1120.1689
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    References listed on IDEAS

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