Hedge funds performance evaluation

Abstract

This paper uses the traditional sharpe and some modern ratios to evaluate the performance of Credit Suisse/Tremont hedge funds index in comparison to the equity, bond and commodity markets. As concluded by previous studies, hedge funds have higher sharp ratios, negative skewness and positive kurtosis than the equity, bond and commodity indices. I found that hedge funds generally exhibit low correlation with the equity (but MSCI world), bond and commodity indices, even during financial crises. This makes hedge funds suitable for portfolio diversification. However, this diversification benefit may be minimized by the fact that the correlation between the hedge fund strategies are moderate, and slightly increase during financial crises. Also, hedge fund strategies generally exhibit higher correlation with MSCI World, Dow Jones-AIG commodity and Dow Jones corporate bond indices, than they exhibit with the other indices. Given the high degree of non-normality hedge funds returns distribution and autocorrelation of returns, modern performance measure were employed in ranking hedge fund, equity, bond and commodity indices for the entire period, during financial and non-financial crises. The sharpe ratio and modern performance measures indicate that hedge funds generally outperformed the equity, commodity and bond (excluding Dow Jones corporate bond) indices more for the non-financial and entire crises periods than during financial crises. Finally, evidence of hedge fund managers’ security selection skills (significant positive alphas) was found, except for managers’ market timing abilities. Also, hedges show low exposure to the market (S&P500 index) movements.