| This study provides a comprehensive analysis of the performance of hedge funds and managed futures funds both as "stand-alone investments" and as "portfolio assets". First, hedge funds and managed futures funds, and their alternative investment styles, are examined by forming equally-weighted (EW) and value-weighted (VW) portfolios of these funds. Based on an analysis using Sharpe ratios as the performance measure, certain hedge fund and managed futures fund investment styles consistently produce higher Sharpe ratios than the S&P 500 Index in all time periods analyzed. Portfolios of Private Pools, Financial Commodity Trading Advisors (CTAs), Agriculture CTAs (among managed futures fund investment styles), and portfolios of Market-Neutral funds, Event-Driven funds, and Global Macro funds (among hedge fund investment styles) appear to be the highest ranking portfolios when they are analyzed as stand-alone investments. These specific hedge fund and managed futures fund investment styles also receive the largest allocations in the diversified portfolios of stocks and bonds, and significantly enhance the performance of those portfolios. In addition, the aforementioned hedge fund and managed futures fund investment styles seem to produce very attractive returns in both bull and bear markets. In the second part, a multi-factor risk model is employed for the first time to estimate the risk-adjusted excess returns (Jensen alphas) of individual hedge funds and managed futures funds. By employing time-series cross-section pooled regressions on monthly returns data, hedge funds and managed futures funds, and their alternative investment styles, are found to produce significantly positive annualized risk-adjusted excess returns (alpha's). Moreover, in a cross-section regression of individual fund alphas on three fund characteristics (size, age, and incentive fee), the strongest explanatory factor appears to be the level of incentive fee. Finally, persistence in fund performance is examined using two different methods: a non-parametric test of quintile analysis, and a parametric test of cross-section regressions. A reasonable degree of persistence is found to exist in hedge fund and managed futures fund performance, especially when performance is measured over a longer period. |
