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Do hedge funds add value to a passive portfolio? Correcting for non-normal returns and disappearing funds

Author

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  • Roy Kouwenberg

    (AEGON Asset Management NL and Erasmus University Rotterdam, AEGON Plein 20)

Abstract

Hedge funds have greatly increased their assets under management in the last decades, partly driven by investments from institutions such as pension funds and endowments funds. This paper considers the added value of an investment in hedge funds from the perspective of a passive investor. The Zurich Hedge Fund Universe is used for the empirical investigation, over the period 1995–2000. The database includes a large number of funds that have disappeared over the years, which reduces the impact of survivorship bias. It is found that hedge fund alphas are positive, even after correcting for the non-normality of the hedge fund return distribution. Over longer periods, however, the added value of hedge funds is severely hampered by the large number of funds disappearing from the database, usually after poor performance. Investors can avoid some of the disappearing and bad performing funds by requiring a track record of good performance.

Suggested Citation

  • Roy Kouwenberg, 2003. "Do hedge funds add value to a passive portfolio? Correcting for non-normal returns and disappearing funds," Journal of Asset Management, Palgrave Macmillan, vol. 3(4), pages 361-382, March.
    • Handle: RePEc:pal:assmgt:v:3:y:2003:i:4:d:10.1057_palgrave.jam.2240089
    DOI: 10.1057/palgrave.jam.2240089
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    Citations

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    Cited by:

    1. Kouwenberg, Roy & Ziemba, William T., 2007. "Incentives and risk taking in hedge funds," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3291-3310, November.
    2. Do, Viet & Faff, Robert & Wickramanayake, J., 2005. "An empirical analysis of hedge fund performance: The case of Australian hedge funds industry," Journal of Multinational Financial Management, Elsevier, vol. 15(4-5), pages 377-393, October.
    3. Eling, Martin & Faust, Roger, 2010. "The performance of hedge funds and mutual funds in emerging markets," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1993-2009, August.
    4. Do, Viet & Faff, Robert & Veeraraghavan, Madhu, 2010. "Performance persistence in hedge funds: Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 346-362, October.
    5. Steri, Roberto & Giorgino, Marco & Viviani, Diego, 2009. "The Italian hedge funds industry: An empirical analysis of performance and persistence," Journal of Multinational Financial Management, Elsevier, vol. 19(1), pages 75-91, February.
    6. Díaz, Antonio & González, María de la O & Navarro, Eliseo & Skinner, Frank S., 2009. "An evaluation of contingent immunization," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1874-1883, October.

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