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The necessity to correct hedge fund returns: empirical evidence and correction method

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  • Georges Gallais-Hamonno

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Huyen Nguyen-Thi-Thanh

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique, LR-MOS - La Rochelle - Management, Organisation & Société - CEREGE [Poitiers, La Rochelle] - Centre de recherche en gestion [EA 1722] - IAE Poitiers - Institut d'Administration des Entreprises (IAE) - Poitiers - UP - Université de Poitiers = University of Poitiers - UP - Université de Poitiers = University of Poitiers - ULR - La Rochelle Université)

Abstract

We study two principal mechanisms suggested in the literature to correct the serial correlationin hedge fund returns and the impact of this correction on financial characteristics of their returnsas well as on their risk level and on their performances. The methods of Geltner (1993), its extensionby Okunev & White (2003) and of Getmansky, Lo & Makarov (2004) are realized on a sampleof 54 hedge fund indexes. The results show that the unsmoothing leaves the mean unchangedbut increases significantly the risk level of hedge funds, whether the risk is measured in terms ofthe return standard-deviation or the modified Value-At-Risk. Funds' performances, measured bytraditional Sharpe ratio and Omega index decline considerably. By contrast, funds' rankings afterthe unsmoothing unexpectedly change slightly. However, some notable modifications in ranks ofseveral funds are observed. The necessary transparency of the management practice requires thatsuch a correction must be systematically done.

Suggested Citation

  • Georges Gallais-Hamonno & Huyen Nguyen-Thi-Thanh, 2007. "The necessity to correct hedge fund returns: empirical evidence and correction method," Working Papers halshs-00184470, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00184470
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00184470
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    References listed on IDEAS

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    1. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
    2. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
    3. Chris Brooks & Harry. M Kat, 2001. "The Statistical Properties of Hedge Fund Index Returns," ICMA Centre Discussion Papers in Finance icma-dp2001-09, Henley Business School, University of Reading.
    4. David M. Geltner, 1993. "Estimating Market Values from Appraised Values without Assuming an Efficient Market," Journal of Real Estate Research, American Real Estate Society, vol. 8(3), pages 325-346.
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    Cited by:

    1. M. Glawischnig & I. Seidl, 2013. "Portfolio optimization with serially correlated, skewed and fat tailed index returns," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 21(1), pages 153-176, January.

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    More about this item

    Keywords

    Sharpe ratio; Omega index; hedge funds; smoothed returns; performance evaluation; rentabilités lissées et délissées; mesure de performance; ratio de Sharpe; indice Omega;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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