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Hedge Fund Performance 1990-2000- Do the "Money Machines" Really Add Value?

Author

Listed:
  • Gaurav Amin

    (ICMA Centre, University of Reading)

  • Harry. M Kat

    (ICMA Centre, University of Reading)

Abstract

In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 - April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.

Suggested Citation

  • Gaurav Amin & Harry. M Kat, 2001. "Hedge Fund Performance 1990-2000- Do the "Money Machines" Really Add Value?," ICMA Centre Discussion Papers in Finance icma-dp2001-05, Henley Business School, University of Reading, revised Sep 2001.
    • Handle: RePEc:rdg:icmadp:icma-dp2001-05
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    References listed on IDEAS

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    Cited by:

    1. Mason Woo & Gregory Connor, 2004. "(IAM Series No 002) An Intro to Hedge Funds," FMG Discussion Papers dp477, Financial Markets Group.
    2. Harry. M Kat & Joelle Miffre, 2002. "Performance Evaluation and Conditioning Information: The case of Hedge Funds," ICMA Centre Discussion Papers in Finance icma-dp2002-10, Henley Business School, University of Reading.
    3. Sandro Lunghi & Daniel Schmidt & Bastian von Beschwitz, 2021. "Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data," Finance and Economics Discussion Series 2021-022, Board of Governors of the Federal Reserve System (U.S.).
    4. Connor, Gregory & Woo, Mason, 2004. "An Introduction to hedge funds," LSE Research Online Documents on Economics 24675, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Hedge Fund; Efficiency; Risk and Return;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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