Asness, Cliff S. and Krail, Robert and Liew, John M., Do Hedge Funds Hedge? (May 2001). Available at SSRN:
https://ssrn.com/abstract=252810 or
http://dx.doi.org/10.2139/ssrn.252810
Abstract
In addition to attractive returns, many hedge funds claim to
provide significant diversification for traditional portfolios. This
paper empirically examines the return and diversification benefits of
hedge fund investing using the CSFB/Tremont hedge fund indices from
1994-2000. We, like many others, find that simple regressions of monthly
hedge fund excess returns on monthly S&P 500 excess returns seem to
support the claims. The regressions show only modest market exposure
and positive added value. However, this type of analysis can produce
misleading results. Many hedge funds hold, to various degrees and
combinations, illiquid exchange-traded securities or difficult-to-price
over-the-counter securities. For the purposes of monthly reporting,
hedge funds often price these securities using either last available
traded prices or estimates of current market prices. These practices can
lead to reported monthly hedge fund returns that are not perfectly
synchronous with monthly S&P 500 returns due to the presence of
either stale or "managed" prices. Non-synchronous return data can lead
to understated estimates of actual market exposure. We employ standard
techniques that account for this problem and find that hedge funds in
the aggregate contain significantly more market exposure than simple
estimates indicate. Furthermore, after accounting for this increased
market exposure, we find that taken as a whole the broad universe of
hedge funds does not add value over this period. With the stock market
still near all-time high valuations, investors who view their hedge
funds as protection from a market correction should consider this a
potentially serious issue.
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