Hedge funds - risks return analysis

Abstract

Abstract: This paper looks at the Hedge Funds as an alternative investment strategy. It enumerates the various characteristics of Hedge Funds that make it different from conventional investment strategies and also investigates into the structure of a typical Hedge Fund. The main thrust of the paper, is however, to present a new approach to investigate into the risk return profile of 18 different hedge fund strategies. The originality of the work lies in using DEA (Data Envelopment Analysis) to decipher the risk return profile of these strategies using advanced measures of risk and return like CVaR, Drawdown and Skewness. The paper also presents results of a z-test that throws light on whether Hedge Funds were responsible for Asian Financial Crisis of 1997. Several other z-tests are also presented in the paper that enables an investor to choose the strategy with best risk return profile and eliminate some during market meltdowns of specific nature. In a nutshell, the paper seeks to demystify Hedge Fund investing for an intelligent investor using the latest mathematical and statistical tools. Keywords: Hedge Fund, Data Envelopment Analysis, Equity, Fixed Income, Sharpe ratio