Study of hedge fund industry and its return from 1990 to 2006

Abstract

Though the hedge funds are portrayed as risky investment instruments, the average is much higher and standard deviation of their returns is much lower than that of the SPX. The Sharpe ratio of different hedge fund strategies is much higher as well than that of SPX and the correlation between the SPX and different hedge fund strategies is low. Hedge fund strategies are able to produce significant amount of alpha when analyzed by single factor and multi factor model. Some of the disadvantages of hedge fund are that the correlation increases during the hour of crisis so that the hedge fund returns and market return move in tandem during such market turmoil and that their returns show non norma1ity and are generally negatively skewed with high kurtosis.