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Hedge Funds: Where is the (H)Edge?

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  • S. Beckers
  • J. Smedts

Abstract

In this paper we investigate to what extent hedge funds are a superior investment alternative. While it is easy to demonstrate that hedge funds dominate traditional investment alternatives when using the standard measures of risk adjusted return, it is also apparent that they are exposed to a host of non-standard risks. These additional sources of risk are sometimes actively sought by hedge funds and support their classification as an ‘alternative’ investment class. Surprisingly though, hedge fund returns are most dominantly determined by the equity market performance, although other variables such as credit spreads and the investing public’s risk appetite can also be shown to have an impact. Fund of hedge funds are the most straightforward vehicle to invest in hedge funds. We demonstrate that their primary value added derives from the diversification they provide across a wide range of hedge fund styles. In this context they can be a useful alternative for investors who consider adding hedge fund exposures to their portfolios.

Suggested Citation

  • S. Beckers & J. Smedts, 2004. "Hedge Funds: Where is the (H)Edge?," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 847-876.
    • Handle: RePEc:ete:revbec:20040409
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    References listed on IDEAS

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    1. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 291-307, September.
    2. Fung, William & Hsieh, David A, 2001. "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 313-341.
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