The opinions expressed in this article are those of the authors and do not necessarily reflect the views of the Banque de France or the institutions with which the authors are affiliated. The authors are grateful to Julien Matheron for providing programmes and useful suggestions. They also wish to thank Iikka Korhonen and Marina Vasjukova as well as the participants of the Third Workshop on Emerging Markets (Bank of Spain, Madrid, 24-25 November 2005) for valuable comments and discussions. The standard disclaimer applies.
This paper analyses the risk and return characteristics of a wide universe of hedge funds in the period 1990–2000. Most major categories of hedge funds are found to have outperformed (often by a considerable margin) the performance of traditional asset classes. The potential impact of hedge fund trading on market spreads and volatilities is examined especially in the period 1998, so as to provide some guidelines in terms of regulation of such funds. It is shown, however, that despite hedge fund difficulties in that period, the inclusion of hedge funds in investor portfolios definitely moves the efficiency frontier outwards, and allows significantly higher levels of returns for given levels of risk. This is primarily because of the low level of correlation of certain hedge fund styles, especially arbitrage strategies, with other hedge fund styles and with traditional assets.
(J.E.L.: G10, G11, G14, G23).
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.