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Quantitative selection of hedge funds using data envelopment analysis

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  • Huyen Nguyen-Thi-Thanh

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    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

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    Abstract

    Previous studies have documented that Data Envelopment Analysis(DEA) could be a good tool to evaluate fund performance,especially the performance of hedge funds as it can incorporatemultiple risk-return attributes characterizing hedge fund's nonnormal return distribution in an unique performance score. Thepurpose of this paper is to extend the use of DEA to the contextof hedge fund selection when investors must face multi-dimensionalconstraints, each one associated to a relative importance level.Unlike previous studies which used DEA in an empirical framework,this research puts emphasis on methodological issues. I showedthat DEA can be a good tailor-made decision-making tool to assistinvestors in selecting funds that correspond the most to theirfinancial, risk-aversion, diversification and investment horizonconstraints.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00067742.

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    Date of creation: Apr 2006
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    Publication status: Published - Presented, , 2006
    Handle: RePEc:hal:journl:halshs-00067742

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    Related research

    Keywords: hedge funds; data envelopment analysis; fund selection; performance measurement; alternative investment;

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    1. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    2. Gregoriou, Greg N. & Sedzro, Komlan & Zhu, Joe, 2005. "Hedge fund performance appraisal using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 164(2), pages 555-571, July.
    3. Zhu, Joe, 2001. "Super-efficiency and DEA sensitivity analysis," European Journal of Operational Research, Elsevier, vol. 129(2), pages 443-455, March.
    4. Per Andersen & Niels Christian Petersen, 1993. "A Procedure for Ranking Efficient Units in Data Envelopment Analysis," Management Science, INFORMS, vol. 39(10), pages 1261-1264, October.
    5. W. Cooper & Shanling Li & L. Seiford & Kaoru Tone & R. Thrall & J. Zhu, 2001. "Sensitivity and Stability Analysis in DEA: Some Recent Developments," Journal of Productivity Analysis, Springer, vol. 15(3), pages 217-246, May.
    6. Jati Sengupta, 2003. "Efficiency tests for mutual fund portfolios," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 869-876.
    7. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
    8. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    9. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.
    10. Sarrico, C. S. & Dyson, R. G., 2004. "Restricting virtual weights in data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 159(1), pages 17-34, November.
    11. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, 06.
    12. Yoon K. Choi & B.P.S. Murthi, 2001. "Relative Performance Evaluation of Mutual Funds: A Non-Parametric Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7&8), pages 853-876.
    13. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    14. Murthi, B. P. S. & Choi, Yoon K. & Desai, Preyas, 1997. "Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach," European Journal of Operational Research, Elsevier, vol. 98(2), pages 408-418, April.
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