Explaining Hedge Fund Performance With Risk

1
Explaining Hedge Fund Performance With Risk

• Sigma Asset Management
• March 1, 2001

2
Agenda

• Background
• Methodology
• Results
• QA

3
Hypothesis

• Hedge funds generate significant excess returns
  after adjusting for risk.

4
Background

• Hedge funds vs. mutual funds
• Trading strategy dynamic vs. static
• Use of leverage
• Regulatory environment
• Compensation of fund managers

5
Background

• Performance and risk of hedge funds
• 1994-2000 r 13.2, ? 10 (annualized)

(Source CSFB/Tremont)
6
Methodology
7
Results
8
Results
9
Summary

• Majority of the HF have ? ? 0
• The relationship between the the benchmark and HF
  returns are not linear.
• The volatility and ? of the HF spikes with the
  extreme benchmark swings.
• The questionable better-then-the-benchmark HF
  returns come at the price of volatility in
  extreme periods.

10
QA

• ? OR E(r)