| The objective of this dissertation is to explore different areas of hedge fund research and to contribute to the present body of knowledge of this rapidly developing area of financial economics. Specifically, this dissertation focuses on three distinct areas of hedge fund research, namely, bias in hedge fund data, the classification of hedge funds, and performance attribution of hedge funds. All studies, reported in this dissertation, have been carried out using the ZCM/Hedge (formerly Mar/Hedge) database.; The performance of hedge funds listed in the ZCM/Hedge database is analyzed using the CAPM for four different study periods. In general, the implication of the CAPM (that the market portfolio is the tangency portfolio) is rejected for all the study periods. The second implication of the CAPM (a positive market risk premium), is also unsupported.; This research uses a cluster-analysis approach to classify hedge funds. The results of the study are compared with the existing classifications of the ZCM/Hedge database. The validity of the classification scheme is checked using a dummy variable regression approach. The clusters with a larger number of hedge funds have statistically significant betas, whereas other clusters have statistically insignificant betas. The validity of the CAPM model is tested using the new classification scheme. The null hypothesis that the market is the tangency portfolio is rejected. The other implication of the CAPM model, a positive market risk premium, is also unsupported.; Analytical models to explain hedge fund return are developed using exact factor-pricing models: the macroeconomic factor model and the fundamental factor model. The results of the macroeconomic model show that only two state variables---default premium and term-premium ---are statistically significant. The results of the two-factor macroeconomic model lead to the conclusion that the macroeconomic variables default premium and term-premium explain hedge fund return in general. This lends support to the similarity hypothesis that the macroeconomic factors that explain equity return also have explanatory power for hedge fund returns. Although not all the R-square values are impressive, it appears that the five-factor model does explain approximately 30% to 40% of the variation in hedge fund return.; The fundamental factor model is developed using fund attributes that should have an effect on hedge fund return. The analysis is carried out using the OLS and WLS estimation procedures. The results are different for the different estimation procedures, leading to the conclusion that caution is appropriate when interpreting results from OLS coefficients because of presence of heteroscedasticity in the cross-sectional data.; The variables that have explanatory power for the category of hedge funds are size, minimum purchase, and stocks. The results validate the conjecture that there are diseconomies of scale in the hedge fund industry. For the class of hedge funds, the independent variables---market beta, size, leverage, redemption frequency, minimum purchase, bonds, and currency---are statistically significant. The results indicate that the hedge fund managers have been able to use leverage to their advantage, but have not been successful in the use of currency. They indicate that hedge fund managers are able to profit from minor price differentials through the use of higher amount of investment. (Abstract shortened by UMI.)... |
