Bridge over ocean
1 November 2002 Financial Analysts Journal Volume 58, Issue 6

Global Hedge Funds: Risk, Return, and Market Timing

  1. Hung-Gay Fung
  2. Xiaoqing Eleanor Xu
  3. Jot Yau

We examined the performance of 115 global equity-based hedge funds with reference to their target geographical markets in the seven-year period 1994–2000. Several results are noteworthy. First, global hedge fund managers do not show positive market-timing ability but do demonstrate superior security-selection ability; the Jensen's alphas we found, before and after controlling for market timing, are sizable and positive. Second, incentive fees and leverage both have a significant positive impact on a hedge fund's risk-adjusted return (as demonstrated by Sharpe ratios and Jensen's alphas) but not on a fund's “selectivity index” (i.e., its performance after controlling for market-timing effects). Third, incentive fees can lower the hedge fund's up-market and down-market systematic risk. Fourth, the size of a hedge fund is consistently related to its return performance. Finally, contrary to the general perception, leverage does not significantly affect the systematic risk of hedge funds.

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