Hedge Fund Performance During and After the Financial Crisis

To begin with, it is very important to mention that hedge fund performance data was provided on a voluntary basis and available to persons depending on the country only. Many hedge funds, however, do publish their monthly performance to inform existing clients and attract new investors. According to D’Alessio (2015), the top five online hedge fund databases are Barclay hedge, Eurekahedge, Hedge Fund Research and Hedge Index. Hedge Index is sponsored by Credit Suisse, and with over 9500 funds, it offers a reliable, large database of reporting funds.

For the purpose of this study, qualitative hedge fund performance data accessed from the Hedge index was used. Reasons for this were the large database, as mentioned above, as well as the easy accessibility. Hedge index defines ten major strategies, namely Convertible Arbitrage, Emerging Markets, Equity Market Neutral, Event Driven, Fixed Income Arbitrage, Global Macro, Long/Short Equity, Managed Futures, Multi Strategy and Short Biased. The indices are asset-weighted and created by Credit Suisse Hedge Index LLC. Hedge funds are chosen from the Credit Suisse Hedge Fund Database, which includes around 9500 funds. All funds feature a minimum twelve-month track record, a minimum of US$50 million, under management, and are able to provide an audited financial statement. The indices reflect net performance and are rebalanced and calculated on a monthly basis. Survivorship bias is limited, by including all funds in the index, until they are fully liquidated or unable to meet the financial reporting requirements. Fees including (but not limited to) management and incentive fees, as well as transaction costs, are considered in the return calculations.

Data for the Carhart four-factor model was obtained from the website of French (2018). The four factors Mkt-Rf (market risk), SMB (Size), HML (Value) and UMD (Momentum) were created from six size/book-to-market benchmark portfolios. These portfolios neither include hold ranges nor transaction costs. The market return was represented by the value-weighted return on all NYSE, NASDAQ and AMEX stocks, obtained from CRSP. To calculate the excess return of small cap stocks over large cap stocks (SMB) the average return on three big portfolios was subtracted from the average return on three small portfolios (value, neutral and growth). The variable HML (high minus low) measured the excess return of the value stocks, over the growth stocks and was calculated by subtracting the average return on the two growth portfolios, from the average return on the two value portfolios (small and big). To calculate the momentum factor (UMD), French used "six value-weighted portfolios formed on size and prior (2–12) returns". UMD equalled the average return on the two high prior return portfolios, minus the average return on the two low prior return portfolios. Portfolios were updated monthly and rebalanced quarterly.