Assessing the Performance of Funds of Hedge Funds
This paper studies the performance of a sample of funds of hedge funds (FoHFs) from January 1994 to August 2009. We apply the false discoveries (FD) technique of Barras, Scaillet and Wermers (2010) to separate the FoHFs into skilled, zero-alpha and unskilled. We measure the alpha of the FoHFs using two models – (1) a 16-factor model with a combination of factors from Fung and Hsieh (2004) and Capocci, Corhay and Hübner (2005) and (2) a 13-factor model of hedge fund indices from Dow Jones Credit Suisse. Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. A series of robustness checks confirms the results of the FD procedure. We also compare the performance of our sample of FoHFs to artificial FoHFs constructed by randomly picking hedge funds. The lack of significant differences in the average performance of the real and artificial FoHFs confirms the results obtained by the FD procedure.
|Date of creation:||Sep 2011|
|Date of revision:|
|Publication status:||Published by:|
|Contact details of provider:|| Postal: |
Phone: +32 (0)2 650.48.64
Fax: +32 (0)2 650.41.88
Web page: http://difusion.ulb.ac.be
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Laurent BARRAS & Olivier SCAILLET & Russ WERMERS, 2005.
"False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,"
FAME Research Paper Series
rp163, International Center for Financial Asset Management and Engineering.
- Laurent Barras & Olivier Scaillet & Russ Wermers, 2010. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Journal of Finance, American Finance Association, vol. 65(1), pages 179-216, 02.
- Laurent BARRAS & Olivier SCAILLET & Russ WERMERS, 2005. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Swiss Finance Institute Research Paper Series 08-18, Swiss Finance Institute, revised Sep 2008.
- Barras, Laurent & Scaillet, Olivier & Wermers, Russ, 2009. "False discoveries in mutual fund performance: Measuring luck in estimated alphas," CFR Working Papers 06-02, University of Cologne, Centre for Financial Research (CFR).
- Olivier Scaillet & Laurent Barras & Russell R. Wermers, 2005. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Working Papers CEB 05-014.RS, ULB -- Universite Libre de Bruxelles.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Capocci Daniel & Corhay Albert & Hübner Georges, 2004.
"Hedge Fund Performance and Persistence in Bull and Bear Markets,"
- Daniel Capocci & Albert Corhay & Georges Hubner, 2005. "Hedge fund performance and persistence in bull and bear markets," The European Journal of Finance, Taylor & Francis Journals, vol. 11(5), pages 361-392.
- Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
- Andrews, Donald W K, 1991.
"Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation,"
Econometric Society, vol. 59(3), pages 817-58, May.
- Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
- Kosowski, Robert & Timmermann, Allan & Wermers, Russ & White, Hal, 2005.
"Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis,"
CFR Working Papers
05-14, University of Cologne, Centre for Financial Research (CFR).
- Robert Kosowski & Allan Timmermann & Russ Wermers & Hal White, 2006. "Can Mutual Fund "Stars" Really Pick Stocks? New Evidence from a Bootstrap Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2551-2595, December.
- John D. Storey, 2002. "A direct approach to false discovery rates," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(3), pages 479-498.
- Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
- Cauchie, Severine & Hoesli, Martin & Isakov, Dusan, 2004.
"The determinants of stock returns in a small open economy,"
International Review of Economics & Finance,
Elsevier, vol. 13(2), pages 167-185.
- Séverine CAUCHIE & Martin HOESLI & Dušan ISAKOV, 2003. "The Determinants of Stock Returns in a Small Open Economy," FAME Research Paper Series rp54, International Center for Financial Asset Management and Engineering.
When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:2013/97544. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels)
If references are entirely missing, you can add them using this form.