Performance of Hedge Fund Strategies in India: An Empirical Analysis

Abstract

Hedge funds are alternative investments, which use pooled funds, and different investment strategies to earn attractive returns to the investors at reduced risk. Hedge funds can be aggressively managed or make use of derivatives and leverage in domestic as well as international markets with the goal of generating high returns. Hedge funds are generally accessible to accredited investors like banks, insurance companies, wealthy individuals, endowments, and pension funds and require large amounts of investment. The study aims to measures the different hedge fund strategies and the performance of hedge fund strategies in India.

Full text

Performance of Hedge Fund Strategies in India: An
Empirical Analysis
Mritunjay Mahato1* and Prof. A. K. Das Mohapatra2
1Research Scholar, Department of Business Administration, Sambalpur University,
Sambalpur, Odisha, (India)
2Professor, Department of Business Administration, Sambalpur University, Sambalpur,
Odisha, (India)
*1Email id: mritunjaymahato2012@gmail.com, 2Email id:akdm.2002@gmail.com
Abstract
Hedge funds are alternative investments, which use pooled funds, and different
investment strategies to earn attractive returns to the investors at reduced risk. Hedge
funds can be aggressively managed or make use of derivatives and leverage in
domestic as well as international markets with the goal of generating high returns.
Hedge funds are generally accessible to accredited investors like banks, insurance
companies, wealthy individuals, endowments, and pension funds and require large
amounts of investment. The study aims to measures the different hedge fund strategies
and the performance of hedge fund strategies in India. The data have been collected
strategy wise from Hedge Fund Research Inc. and Eurekahedge, covering a period of
10 years from January 2008 to December 2017. The descriptive statistics and Sharpe
ratio have been used in this study. The study shows that the five strategies, namely,
Equity Hedge Strategy, Event Driven strategy, Fund of Funds Strategy, Macro
Strategy and Relative Value Strategy. The Relative Value Strategy is the strategy that
gives the maximum performance of a hedge fund in India.
Keywords: Hedge funds, Equity Hedge, Event Driven, Fund of Funds, Macro, Relative
value.
1. Introduction
Hedge funds are alternative investments, which use pooled funds, and different investment
strategies to earn attractive returns to the investors at reduced risk. Once familiar to a very
limited number of sophisticated investors only, hedge funds have gradually become part of
many institutional portfolios. A hedge fund portfolio consists of different assets classes like
equities, derivatives, bonds, convertible securities and currencies. A collection of different
assets that strives to ‘hedge’ risks to investor’s money against variations of the market,
investors need aggressive management. Investors hold both long and short positions,
including positions in listed and unlisted derivatives. Hedge funds are privately managed by
accredited managers. Only wealthy investors can invest in hedge fund. So, the accredited
managers buy and sell assets at a dizzying speed to keep up with the market movements.
Journal of Information and Computational Science
Volume 10 Issue 2 - 2020
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Hedge funds can be aggressively managed or make use of derivatives and leverage in
domestic as well as international markets with the goal of generating high returns. Hedge
funds are generally accessible to accredited investors like banks, insurance companies,
wealthy individuals, endowments, and pension funds and require large amounts of
investment. These funds work either as private investment partnership or offshore
corporations. They keep their money in the fund for at least one year, which is known as the
lock up period and withdrawal can happen at certain intervals like quarterly or half yearly.
Usually the hedge funds face lesser regulatory pressure than mutual funds and other
investment vehicles. Similarly, hedge funds are not required to disclose their net annual value
at periodic intervals like the mutual funds. Hedge funds use different investment strategies to
acquire advantage of certain identifiable market opportunities.
2. Review of Literature
Ackermann et al. (1999) has found that that diverse investment options made difficult to
classify fund and identify the correct benchmark due to the short period. Liang (1999) has
concluded that the hedge funds were provided higher Sharpe ratios and performance than
mutual funds through better manager skills, although hedge fund returns were more volatile.
Average hedge fund returns were related positively to incentive fees, fund assets, and the
lockup period. Fung and Hsieh (1999) have concluded that the risk of hedge fund investments
returns was primarily driven by non-linear dynamic strategies. Agarwal and Naik (2000) have
concluded with the finding that a multi-period framework was considerably smaller than that
observed under the traditional two-period frameworks and no persistence in the yearly return
level in the multy-period framework. Edwards and Caglayan (2000) have concluded that
hedge funds managers were got higher incentive fees due to higher excess returns. Fung and
Hsieh (2000) have concluded that the individual hedge fund style was used to measures the
performance of funds of the hedge fund. Liang (2000) has found that there was a significant
difference in hedge fund returns, inception date, net assets value, incentive fee, management
fee, and investment styles. Amin and Kat (2003) have concluded with the findings that the
main attraction of hedge funds lays in the weak relationship between hedge fund returns and
returns on other assets classes. Gupta et al. (2003) have found that estimated alpha was good
estimates of the true alpha due to hedge fund manager’s skills. Jean-François Bacmann and
Stefan Scholz (2003) have concluded that the Sharpe ratio was used to analyze performance,
some investments were mistakenly showing better or worse because all the risk features were
not taken into account. So, this study also ended that omega measures and Stutzer index were
used for performance measures. They have also found that the omega measures and Stutzer
index were used for measures the performance. Malkiel and Saha (2004) have concluded with
the findings that hedge funds were riskier and provide lower returns than common funds.
Gregoriou et al. (2004) have found that Data Envelopment Analysis (DEA) was used as an
alternative selection tool to assist pension funds, institutional investors, FOF managers and
high net-worth individuals in selecting efficient hedge funds.
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3. Objectives
The study has two broad objectives as follows:
1. To determine the different hedge fund strategies perform in India.
2. To measures the performance of hedge fund strategies in India.
4. Research Methodology
The following methodology has been adopted for the study:
Data source: The required data for the study has been collected from secondary source. The
specific source from which data has been collected is the Hedge Fund Research Inc., and
Eurekahedge.
Sample size and Sampling: A total of five Hedge Fund Strategies selected at random out of
several Hedge Fund Strategies being used in India. Selection of these five strategies has been
based on convenience.
Periodicity: The data have been collected strategy wise from Hedge Fund Research Inc. and
Eurekahedge, covering a period of 10 years from January 2008 to December 2017.
Variables: This study includes five different hedge fund strategies to represent as variables.
The five strategies are Equity Hedge, Event-Driven, Fund of Funds, Macro and Relative
value.
Tools and Techniques used: To measures the performance of hedge fund strategies, the
descriptive statistics and Sharpe ratio have been used in this study.
5. Analysis and Interpretation
Performance of Hedge Fund Strategies has been analyzed here and the result thereof has been
shown in Table 1. As stated before, the identified Hedge Fund Strategies are Equity Hedge
Strategy (EHS), Event Driven Strategy (EDS), Fund of Funds Strategy (FOF), Macro
Strategy (MCS), and Relative Value Strategy (RVS). Table 1 contains the performance of
Hedge Fund Strategies.
Table 1. Descriptive statistics of the returns on Hedge Fund Strategies
Hedge Fund Strategies
Minimum
Maximum
Mean
Standard
Deviation
Skewness
Kurtosis
EHS
-17.090
10.080
0.332
2.490
-0.977
2.200
EDS
-17.830
11.510
0.367
1.397
2.215
7.523
FOF
-7.660
4.930
0.104
1.463
-1.425
4.950
MCS
-4.510
7.500
0.177
1.372
0.238
4.950
RVS
-16.010
9.74
0.421
1.653
-1.678
8.148
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Note: EHS =Equity Hedge Strategy, EDS= Event Driven Strategy, FOF= Fund of Funds
Strategy, MCS= Macro Strategy and RVS= Relative Value Strategy.
It is observed from Table 1 that Relative Value Strategy (RVS) has recorded the highest
return with a mean value of 0.421 among all the five sub strategies of Hedge Fund Strategies.
This is followed by Event Driven Strategy (EDS), Equity Hedge Strategy (EHS), Macro
Strategy (MCS) and Fund of Funds Strategy (FOF) with the mean values of 0.367, 0.332,
0.177, and 0.104 respectively.
It is also observed that Equity Hedge Strategy (EHS) is the strategy that carries the highest
risk with the standard deviation of 2.490. This turns out to be the most volatile strategy
among all the strategies in the category. Moreover, it is also found that the skewness in Event
Driven Strategy (EDS) and Macro Strategy (MCS) have been positive. Further, it is also
found that the skewness in Equity Hedge Strategies (EHS), Fund of Funds Strategy (FOF)
and Relative Value Strategy (RVS) have been negative. A positive skewness indicates
existence of a higher probability of earning extreme positive returns and a negative skewness
indicates existence of a higher probability of earning extreme negative returns.
Similarly, the kurtosis values of the returns of the strategies have been calculated to
determine the steadiness of the earnings. A leptokurtic distribution would mean the earnings
being more consistent, whereas a platykurtic distribution would mean the returns have
‘outliers’, that is, the returns not being stable. In case of Hedge Fund Strategies, as Table 1
shows Event Driven Strategy (EDS), Fund of Funds Strategy (FOF), Macro Strategy (MCS),
and Relative Value Strategy (RVS) have kurtosis value ranging from 4.950 and 8.148.
Therefore, it may be concluded that the return of Event Driven Strategy (EDS), Fund of
Funds Strategy (FOF), Macro Strategy (MCS), and Relative Value Strategy (RVS) have been
‘leptokurtic’; hence they give a consistent return. But, the kurtosis value of Equity Hedge
Strategies (EHS) has 2.200, which is below 3.00. It is therefore ‘platykurtic’, having
‘outliers’, and hence their returns are not stable.
Further, a graphical representation of the performance of Hedge Fund Strategies over the 10
years period under study has been made for a quick comprehension. The graphs have been
drawn for the overall performance. Fig. 1 to Fig. 5 show the performance of Equity Hedge
Strategy (EHS), Event Driven Strategy (EDS), Fund of Funds Strategy (FOF), Macro
Strategy (MCS), and Relative Value Strategy (RVS) The X-axis represents time period and
the Y-axis represents ‘return’ of Hedge Fund Strategies.
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Volume 10 Issue 2 - 2020
ISSN: 1548-7741
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Figure 1. Overall return of Equity Hedge
Strategies
Figure 2. Overall return of Event Driven
Strategies
Figure 3. Overall return of Fund of Funds
Strategies
Figure 4. Overall return of Macro Strategies
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Jan/08
Sep/08
May/09
Jan/10
Sep/10
May/11
Jan/12
Sep/12
May/13
Jan/14
Sep/14
May/15
Jan/16
Sep/16
May/17
Equity Hedge Strategies
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
Jan/08
Aug/08
Mar/09
Oct/09
May/10
Dec/10
Jul/11
Feb/12
Sep/12
Apr/13
Nov/13
Jun/14
Jan/15
Aug/15
Mar/16
Oct/16
May/17
Dec/17
Event Driven Strategies
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
Jan/08
Aug/08
Mar/09
Oct/09
May/10
Dec/10
Jul/11
Feb/12
Sep/12
Apr/13
Nov/13
Jun/14
Jan/15
Aug/15
Mar/16
Oct/16
May/17
Dec/17
Fund of Funds Strategies
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Jan/08
Aug/08
Mar/09
Oct/09
May/10
Dec/10
Jul/11
Feb/12
Sep/12
Apr/13
Nov/13
Jun/14
Jan/15
Aug/15
Mar/16
Oct/16
May/17
Dec/17
macro strategies
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Volume 10 Issue 2 - 2020
ISSN: 1548-7741
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Figure 5. Overall return of Relative Value Strategies
It is observed from the above figures that the returns have varied between 6.37% to minus (-)
9.46% in case of Equity Hedge Strategy (EHS) as can be seen from Figure 1; 4.74% to
minus (-)8.19% in case of Event Driven Strategy (EDS) as depicted in Figure 2; 3.32% to
minus (-) 6.54% in case of Fund of Funds Strategy (FOF) as reflected in Figure 3; 4.22% to
minus (-) 2.62% in case of Macro Strategy as depicted in Figure 4; 3.93% to minus (-)8.03%
in case of Relative Value Strategy (RVS) as reflected in Figure 5.
The actual risk and return of Hedge Fund Strategies have been analyzed here and the results
shown in Table 2. There are five Hedge Fund Strategies, namely, Equity Hedge Strategy
(EHS), Event Driven Strategy (EDS), Fund of Funds Strategy (FOFs), Macro Strategy
(MCS), and Relative Value Strategy (RVS), against which the analyses have been made here.
Table 2. Sharpe ratio of the returns on Hedge Fund Strategies
Hedge fund Strategies
Return
Risk Free
Return
St. Deviation
Sharpe Ratio
EHS
0.043
0.028
0.134
0.109
EDS
0.048
0.028
0.130
0.151
FOFs
0.015
0.028
0.082
-0.186
MCS
0.020
0.028
0.052
-0.189
RVS
0.058
0.028
0.108
0.348
Note: EHS =Equity Hedge Strategy, EDS= Event Driven Strategy, FOFs= Fund of Funds
Strategy, MCS= Macro Strategy and RVS= Relative Value Strategy.
It is observed from Table 2 that the Sharpe ratio of Relative Value Strategy (RVS) is found to
be the highest out of the other Hedge Fund Strategies with a Sharpe value of 0.348. This
implies that Relative Value Strategy (RVS) gives the highest annual return per unit of risk
over the period of 10 years ranging from 2008 to 2017. This is followed by Event Driven
Strategy (EDS), Equity Hedge Strategy (EHS), Fund of Funds Strategy (FOFs) and Macro
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
Jan/08
May/08
Sep/08
Jan/09
May/09
Sep/09
Jan/10
May/10
Sep/10
Jan/11
May/11
Sep/11
Jan/12
May/12
Sep/12
Jan/13
May/13
Sep/13
Jan/14
May/14
Sep/14
Jan/15
May/15
Sep/15
Jan/16
May/16
Sep/16
Jan/17
May/17
Sep/17
Relative Value Strategies
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Strategy (MCS), with the values of 0.151, 0.109, -0.186, -0.189 respectively. It is found that
Sharpe ratio in Relative value strategy (RVS) gives higher value per unit of return, which
implies that investors should favour to invest in Relative Value Strategy (RVS). Further, the
Equity Hedge Strategy (EHS) is more volatile and risky compared to other hedge fund
strategies. But investors cannot get highest return per unit. If investor does not expect this to
continue in the future, they should change their strategy.
The actual risk and return of the Hedge Fund Strategies have also been shown graphically for
a quick comprehension. The graph has been drawn for risk and return of different Hedge
Fund Strategies. Fig. 6 depicts the risk and return of different Hedge Fund Strategies namely,
Equity Hedge Strategy (EHS), Event Driven Strategy (EDS), Fund of Funds Strategy (FOFs),
Macro Strategy (MCS), and Relative Value Strategy (RVS). The X-axis represents different
Hedge Fund Strategies whereas the Y-axis represents the Sharpe ratio.
Figure 6. Sharpe ratio of Hedge Fund Strategies
Note: EHS =Equity Hedge Strategy, EDS= Event Driven Strategy, FOFs= Fund of Funds
Strategy, MCS= Macro Strategy and RVS= Relative Value Strategy
Figure 6 depicts the returns of different Hedge Fund Strategies over the 10 years period from
January 2008 to December 2017 under study. The X-axis represents different Hedge Fund
Strategies whereas the Y-axis represents the Sharpe ratio and Return of different Hedge Fund
Strategies, namely, Equity Hedge Strategy (EHS), Event Driven Strategy (EDS), Fund of
Funds Strategy (FOFs), Macro Strategy (MCS), and Relative Value Strategy (RVS). Fig. 6
also depicts that the Equity Hedge Strategy (EHS), Event Driven Strategy (EDS), and
Relative Value Strategy (RVS) gives positive risk and return whereas Fund of Funds Strategy
(FOFs) and Macro Strategy (MCS) gives negative risk and return.
6. Conclusion
The variation of the performance has been measured across five Hedge Fund Strategies,
namely, Equity Hedge Strategy (EHS), Event Driven Strategy (EDS), Fund of Funds Strategy
-0.300
-0.200
-0.100
0.000
0.100
0.200
0.300
0.400
EHS EDS FOFS MCS RVS
Hedge Fund strategies
Return
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ISSN: 1548-7741
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(FOFs), Macro Strategy (MCS), and Relative Value Strategy (RVS) through descriptive
statistics and Sharpe ratio. The variation of the return of Hedge Fund Strategies over the 10
years period from 2008 to 2017 has been analyzed with the findings that Relative Value
Strategy (RVS) is found to be more consistent among all the five identified Hedge Fund
Strategies.
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Websites
www.hedgefundresearch.com
www.eurekahedge.com
www.investopedia.com
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Volume 10 Issue 2 - 2020
ISSN: 1548-7741
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