The Peer Performance of Hedge Funds
AbstractAn essential component in the analysis of (hedge) fund returns is to measure its performance with respect to the group of peer funds. Through the analysis of risk-adjusted return percentiles an answer is given to the question how many funds are out-performed by the focal fund. In case all funds perform equally well, this approach will lead a random number between zero and one, depending on how lucky the fund is. We use the false discovery rate approach to construct relative performance ratios that account for the uncertainty in estimating the performance differential of two funds. Our application is on hedge funds, which leads us to develop a test for equality of the modified Sharpe ratio of two funds. The effectiveness of the method is illustrated with a Monte Carlo study and an empirical study is performed on the Hedge Fund Research database.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1329.
Date of creation: 2013
Date of revision:
equal-performance ratio; false discovery rate; hedge fund; modified Sharpe ratio; out-performance ratio; peer group; performance measurement;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-EFF-2013-09-26 (Efficiency & Productivity)
- NEP-FMK-2013-09-26 (Financial Markets)
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