Evaluating hedge fund performance: a stochastic dominance approach
AbstractWe introduce a general and flexible framework for hedge fund performance evaluation and asset allocation: stochastic dominance (SD) theory. Our approach utilizes statistical tests for stochastic dominance to compare the returns of hedge funds. We form hedge fund portfolios by using SD criteria and examine the out-of-sample performance of these hedge fund portfolios. Compared to performance of portfolios of randomly selected hedge funds and mean-variance efficient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio.Keywords: Alpha; Mean Variance analysis; Portfolio; Risk Return
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp591.
Date of creation: Jul 2007
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Sheng Li & Oliver Linton, 2007. "Evaluating hedge fund performance: a stochastic dominance approach," LSE Research Online Documents on Economics 24486, London School of Economics and Political Science, LSE Library.
- L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
- F3 - International Economics - - International Finance
- G3 - Financial Economics - - Corporate Finance and Governance
- J1 - Labor and Demographic Economics - - Demographic Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-08 (All new papers)
- NEP-EFF-2007-08-08 (Efficiency & Productivity)
- NEP-RMG-2007-08-08 (Risk Management)
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