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Performance of emerging hedge funds

The aim of this master’s thesis is to provide further evidence on the performance of emerging hedge funds and on the differences, they may have compared with the older and larger hedge funds. We study the style-adjusted alphas of emerging hedge funds relative to similar hedge funds that employ the same strategies. We also inspect the associated performance persistence, size effects and strategy differences within our emerging hedge fund population. The prior literature on the performance of emerging hedge fund suggests that emerging funds are able to provide significant alpha during their early operational life’s when compared with the more established hedge funds. Existing literature has associated emerging hedge funds with characteristics of being nimbler in their investment strategies and fee structures.

In this thesis, we have collected our data from two commercial hedge fund databases. These databases were Lipper TASS and HFR, where we collected all the fund related data from 1996 until 2011 in TASS and from 1996 until 2017 in HFR. Based on these two databases we have formed a combined data sample, where we have all the unique funds from both databases. The main analysis of the thesis is based on style-adjusted alphas and we employ two types of time alignment methods, where the first one is based on the event time and the second one is based on cohorts formed by the calendar years.

Our first evidence suggests that findings of prior literature on performance of emerging hedge funds have deteriorated in magnitude. We find that style-adjusted performance of emerging funds is substantially lower than previous literature has suggested. In our cohort analysis, we noticed that emerging hedge funds are subject to over time deteriorating performance and they were only able to provide positive style-adjusted alpha during the first year of their operations. In our data, the mid-sized funds performed the best during the launch instead of the larger funds that usually have been seen to perform the best during the initial launch. Our second finding indicates that the emerging hedge funds have not been able to provide a positive style-adjusted alpha after the financial crisis of 2008. Thirdly, we find evidence that when dividing emerging hedge funds into broad strategy classifications, the directional traders classification was the only strategy classification among emerging hedge funds that were able to deliver positive average alpha during our time series. This finding suggests that the positive style-adjusted performance that we saw for our whole emerging hedge fund return series is driven to a great extent by this sub-sample of emerging hedge funds and do not represent the whole industry of emerging funds.

Based on the findings of this thesis, investors who allocate capital towards emerging funds and managers, would be able to achieve higher relative returns and diversification benefits compared with the more established hedge funds, if they focus on investing in emerging hedge funds that belong to directional traders broad strategy classification, as the whole emerging hedge funds industry has not been able to deliver relative alpha. Therefore, allocating capital broadly towards emerging hedge funds is not a valid investment strategy to diversify existing hedge fund portfolio unlike prior literature may have suggested.

Identiferoai:union.ndltd.org:oulo.fi/oai:oulu.fi:nbnfioulu-201809052708
Date06 September 2018
CreatorsLeppänen, M. (Mikael)
PublisherUniversity of Oulu
Source SetsUniversity of Oulu
LanguageEnglish
Detected LanguageEnglish
Typeinfo:eu-repo/semantics/masterThesis, info:eu-repo/semantics/publishedVersion
Formatapplication/pdf
Rightsinfo:eu-repo/semantics/openAccess, © Mikael Leppänen, 2018

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