malkiel-hf-risk-return - Preliminary Draft: Not for...

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Preliminary Draft: Not for quotation or citation. Hedge Funds: Risk and Return December 1, 2004 Burton G. Malkiel Atanu Saha * Working Paper The authors are with Princeton University and Analysis Group respectively. We are enormously indebted to Chia Hsun Chang, Derek Jun, Jonathan Blumenstein, and Alison Jonas for invaluable research assistance. We also want to acknowledge the help of Emil Czechowski, Kevin Laughlin, Frank Vannerson, and Basak Yeltekin. This work was supported by Princeton’s Center for Economic Policy Research. PLEASE NOTE: THE CONTENT OF THIS PAPER IS UNDER REVIEW. SOME CONTENT IS STILL BEING REFINED. THIS PAPER IS INTENDED TO BE USED FOR DISCUSSION PURPOSES ONLY.
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Preliminary Draft: Not for quotation or citation. 2 Hedge Funds: Risk and Return Burton G. Malkiel Atanu Saha Abstract Constructing a data base that is relatively free of bias, this paper provides measures of the returns of hedge funds as well as the distinctly non-normal characteristics of the data. We provide risk-adjusted measures of performance as well as tests of the degree to which hedge funds live up to their claim of market neutrality. We also examine the substantial attrition of hedge funds and analyze the determinants of hedge fund survival as well as perform tests of return persistence. Finally, we examine the claims of the managers of “funds of funds” that they can form portfolios of “the best” hedge funds and that such funds provide useful instruments for individual investors. We conclude that hedge funds are far riskier and provide much lower returns than is commonly supposed.
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Preliminary Draft: Not for quotation or citation. 3 Hedge funds have become an increasingly popular asset class during the 1990s and early 2000s. Amounts invested in global hedge funds have risen from approximately $50 billion in 1990 to approximately $1 trillion by the end of 2004. Because these funds characteristically employ substantial leverage, they play a far more important role in global securities markets than the size of their net assets indicates. Market makers on the floor of the New York Stock Exchange have estimated that during 2004, trades by hedge funds have often accounted for more than half of the total daily number of shares changing hands. Moreover, investments in hedge funds have become an important part of the asset mix of institutions and even wealthy individual investors. In this paper, we will first examine the characteristics of the hedge fund universe and the claims made by hedge fund managers regarding their performance over time. We then carefully examine the data bases that have been used to measure hedge fund performance and estimate the magnitude of two substantial biases in the data series. We shall see that these biases are far greater than has been estimated in previous studies.
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This note was uploaded on 12/08/2011 for the course CIS 625 taught by Professor Michaelkearns during the Spring '12 term at Pennsylvania State University, University Park.

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malkiel-hf-risk-return - Preliminary Draft: Not for...

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