Opacity, Risk, Performance and Inflows in Hedge Funds

Abstract

This article analyzes the relationship between opaque assets and the risks, returns and inflows of hedge funds. In particular, we use a unique dataset containing information required by a Brazilian regulator to evaluate the amount invested by funds in forward and future contracts, swaps and options in the context of qualified and non-qualified investors. Our results show a positive association between the positions in derivatives and the variations in risk and a negative association between derivatives (especially swaps) and the funds' monthly performances. This means that the use of more derivatives is related to higher risk (total and systematic) without the benefit of higher return. Hedge funds adopting leveraged operations with derivatives also present a lower annual performance. In general, there is significant evidence that swaps are related to fund inflows in a negative way with regard to qualified and non-qualified investors.

Importance Weights of Performance Ratios: Analyzing Hedge Funds by Entropy Method

“…However, hedge fund managers' ability to anticipate and use disruptive market events is not very strong (Chelikani et al 2019). Hedge funds that apply leveraged transactions with derivative instruments have lower annual performance (Januzzi et al 2020). Only 2.68% of hedge funds are truly talented, 33.20% are unskilled, and the rest have not caught alpha (Maladi, 2020).…”