On taking the 'alternative' route: risks, rewards, style and performance persistence of hedge funds

Finance

IFA Working Paper

Agarwal V;Naik N Y

Narayan Naik

1999

Using a new database of hedge funds, this paper provides a comprehensive analysis of the risk-return characteristics, risk exposures, style analysis and performance persistence of various hedge fund strategies. We conduct a mean-variance analysis to find that a combination of alternative investments and passive indexing in the different asset classes. Using a broad asset class factor model, we find that the hedge fund strategies outperform the benchmark by a range of 6% to 15% per year. Using generalised style analysis, we infer the significant risk exposures of different hedge fund strategies and find results consistent with their investment objectives. Finally, using parametric and non-parametric methods, we examine persistence in the performance of hedge fund managers. We find a reasonable degree of persistence which seems to be attributable more to the losers continuing to be losers instead of winners continuing to be winners.

Institute of Finance and Accounting

FIN 289

IFA Working Paper

No