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Hedge Funds and Their Performance Between 1994 and 2008

Author

Listed:
  • Tomáš Jeřábek

Abstract

The article presents the key milestones in the hedge funds development and addresses the current state of the hedge fund industry. It defines the term hedge fund is defined and discusses the key hedge fund investment strategies. In the section on problems associated with the measurement of hedge fund returns the key biases in the hedge fund indices are discussed. Based on average annual returns, CAPM’s alpha, Sharpe and Sortino ratios, the hedge funds returns between 1994 and 2008 are analyzed and compared to returns on selected market indices - S&P500, MSCI World a Russell 2000. The key conclusion from the return analysis is that although some hedge fund strategies managed to beat the selected market indices, hedge funds on the aggregate level were not able to provide higher returns than the market benchmarks if the biases specific for hedge fund indices are taken into consideration. However, the key potential of hedge funds is in their ability to flexibly respond to extreme market conditions. This fact is evidenced in both lower volatility of hedge fund returns and the above average return relative to market indices in times of capital market crises.

Suggested Citation

  • Tomáš Jeřábek, 2009. "Hedge Funds and Their Performance Between 1994 and 2008," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(1), pages 51-65.
  • Handle: RePEc:prg:jnlcfu:v:2009:y:2009:i:1:id:19:p:51-65
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    References listed on IDEAS

    as
    1. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 291-307, September.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    3. 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, June.
    4. Posthuma, Nolke & Sluis, Pieter Jelle van der, 2003. "A Reality Check on Hedge Funds Returns," Serie Research Memoranda 0017, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    5. Liang, Bing, 2000. "Hedge Funds: The Living and the Dead," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 309-326, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Hedge funds; Return; Analysis; Hedgeové fondy; Výkonnost; Analýza;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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