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Measuring the performance of hedge funds using two-stage peer group benchmarks

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Abstract
This paper is the first to present a two-stage peer group benchmarking approach to evaluate the performance of hedge funds. We present different ways of orthogonalizing the peer group benchark and discuss their propperties in general. We propose to orthogonalize the benchmark against all other exogenous factors. For a broad dataset we show that this approach captures much more commonalities in hedge funds returns compared to the standard methodology if only classical exogenous factors are used. As a result the empirical rankings of hedge funds on the basis of alphas received by this new approach change heavily. Therefore, the proposed two-stage peer group benchmark allows us to better determine which hedge fund managers outperformed the others in the past.

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  • Wilkens, Marco & Yao, Juan & Jeyasreedharan, Nagaratnam & Oehler, Patrick, 2013. "Measuring the performance of hedge funds using two-stage peer group benchmarks," Working Papers 2013-18, University of Tasmania, Tasmanian School of Business and Economics, revised 01 Jun 2013.
    • Handle: RePEc:tas:wpaper:17315
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    File URL: http://eprints.utas.edu.au/17315/1/2013-18_Sree_WP2013_Measuring_the_Performance_of_Hedge_Funds.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Hedge Funds; Performance Measurement; Factor Model; Peer Group Benchmark.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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