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• W3124685277 abstract "(ProQuest: ... denotes formulae omitted.)IntroductionOver the past two decades, the hedge fund industry has grown substantially. Hedge Fund Research (HFR) reported on January 20, 2010 that there were about 530 hedge funds in the industry in 1990 with roughly $50 bn of assets under management. By 2009, that number rose to approximately 8,000 hedge funds with about $1.6 tn of assets under management. This impressive growth of the hedge fund industry has attracted the attention of investors, practitioners and academicians alike. It has been documented by Liang (1999), Agarwal and Naik (2000), Edwards and Caglayan (2000), Cerrato and Iannelli (2006) that hedge funds tend to outperform the conventional market indexes such as the S&P 500 during bearish markets, while the traditional indexes tend to outperform hedge funds during bullish markets. This feature, among others, like low risk and low correlation with traditional asset returns make hedge funds attractive hedging instruments.Given their importance in financial markets, a number of studies have examined the ability of hedge funds to act as diversification tools. For instance, Gregoriou et al. (2001) examined the random walk behavior of 10 hedge fund classes, including event-driven, global international, global established, global emerging, global macro, market neutral, fund of hedge funds, short sellers, long only, and sector, for the time period January 1991 through December 2000. They applied the standard ADF unit root testing procedure and found that the median returns of all the hedge fund classes with the exception of the market neutral are random walk processes. They therefore concluded that investors should be able to reduce risk by including hedge funds in their portfolios within the market neutral class.Similarly, Cerrato and Iannelli (2006) examined the random walk behavior of nine categories of hedge funds, viz., event-driven, CSFB, MSCI, convertible arbitrage, market neutral, fixed income arbitrage, global macro, long-short equity, and short equity bias for the period running from December 1993 through December 2003. They applied the minimum sequential ADF test proposed by Banerjee et al. (1992). They found that the returns for all the hedge fund strategies with the exception of those for global macro and market neutral are random walk processes. They, therefore, concluded that investors can reduce risk by including hedge funds in their portfolios within the global macro and market neutral strategies.On related studies, Schneeweis and Spurgin (1998), Fung and Hsieh (1999), and Agarwal and Naik (2004) examined the relationship between hedge funds and the traditional asset returns. They found that hedge fund returns tend to exhibit low correlation with the returns of traditional asset returns. Schneeweis et al. (2002) found that the combination of hedge funds in portfolios with the conventional assets such as stocks and bonds tends to reduce risk and improve returns.Shocks have permanent effects if hedge fund returns are unit root processes. In which case, hedge funds cannot serve as effective hedging instruments against fluctuations in other financial markets, including the equity, bond and foreign exchange markets, as they do not revert to their past mean levels after a shock. On the other hand, shocks are temporary if hedge fund returns are stationary processes. This implies that hedge fund returns tend to revert to their mean levels after a shock. From an investment perspective, hedge funds can be combined in portfolios with the traditional investment instruments such as stocks, bonds and foreign exchange to reduce risk.From the preceding literature review, it is obvious that the use of hedge funds to reduce portfolio risk lacks consensus among researchers. For instance, Gregoriou et al. (2001) recommend only hedge funds within the market neutral class for inclusion in a portfolio of traditional assets. On the other hand, Cerrato and Iannelli (2006) suggest that only the hedge funds within the global macro and market neutral strategies should be combined with traditional assets in a portfolio in order to reduce risk and boast returns. …" @default.
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• W3124685277 date "2013-01-01" @default.
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• W3124685277 title "Are Shocks to Hedge Fund Returns Permanent or Temporary" @default.
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