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Stochastic dominance analysis of Asian hedge funds

Listed author(s):
  • Wong, Wing-Keung
  • Phoon, Kok Fai
  • Lean, Hooi Hooi

We employ the stochastic dominance approach that utilizes the entire return distribution to rank the performance of Asian hedge funds as traditional mean-variance and CAPM approaches could be inappropriate given the nature of non-normal returns. We find both first-order and higher-order stochastic dominance relationships amongst the funds and conclude that investors would be better off by investing in the first-order dominant funds to maximize their expected wealth. By investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in hedge fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in a hedge fund's track record.

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Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 16 (2008)
Issue (Month): 3 (June)
Pages: 204-223

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Handle: RePEc:eee:pacfin:v:16:y:2008:i:3:p:204-223
Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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