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Performance Overview of Indian Hedge Fund Industry
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Many institutional investors use the traditional Sharpe ratio today to examine the risk-adjusted performance of funds of hedge funds (FoFs). However, this could pose problems due to the non-normal returns of this alternative asset class. A modified value at risk (VAR) and modified Sharpe ratio solves the problem and can provide a superior tool for correctly measuring the risk-adjusted performance. In this article, we rank 30 funds of hedge funds according to the Sharpe and modified Sharpe ratios. The results indicate that the modified Sharpe is more accurate when examining non-normal returns.
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 provides significantly better risk-return tradeoff than passively investing 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. We infer the significant risk exposures of different hedge fund strategies using generalized style analysis 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.
The authors explore performance persistence in mutual funds using absolute and relative benchmarks. Their sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A profit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures. Copyright 1995 by American Finance Association.
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