Hedge fund strategies in the post-crisis era

Official URL: https://dx.doi.org/10.1093/oxfordhb/9780198840954.013.24

This chapter examines the performances of various hedge fund strategies based on various reward-to-risk ratios after the 2008 global crisis. We document that a majority of hedge fund strategies deliver lower average returns compared to equities and bonds; yet the volatilities of their returns have also been low. The equity hedge strategy has the highest reward-to-risk ratios among the major strategy categories, whereas the relative value arbitrage strategy has the lowest. Technology/healthcare, merger arbitrage, discretionary thematic, and asset-backed arbitrage strategies tend to have the highest reward-to-risk ratios in their respective categories. Time-series regressions of hedge fund strategy returns on various fund pricing factors provide evidence that hedge funds, on average, do not generate abnormal returns once the pricing factors are controlled for. We also document that hedge fund strategy returns generally load negatively on the bond market and aggregate credit risk factors and positively on the market portfolio.