Structured Hedge Fund and Traditional Mutual Fund

by

Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

Abstract

Use of short selling and derivatives is limited in most emerging markets because such instruments are not as readily available as they are in developed capital markets. These limitations raise questions about the value added provided by hedge funds, especially compared to traditional mutual funds active in these markets. We use five existing performance measurement models plus a new asset-style factor model to identify the return sources and the alpha generated by both types of funds. We analyze sub-periods, different market environments, and structural breaks. Our results indicate that some hedge funds generate significant positive alpha, whereas most mutual funds do not outperform traditional benchmarks. We find that hedge funds are more active in shifting their asset allocation. The higher degree of freedom that hedge funds enjoy in their investment style might thus be one explanation for the differences in performance.

Table of Contents

ABSTRACT4

CHAPTER 1: INTRODUCTION6

Background of the Study6

Outline of the Study6

CHAPTER 2: LITERATURE REVIEW8

2. Efficacy measurement models13

2.1. Traditional efficacy measurement models13

CHAPTER 3: METHODOLOGY21

DETAILS OF THE WORKINGS AND DATABASES USED25

Thomson Financial DataStream25

CHAPTER 4: RESULTS AND ANALYSIS30

4.1. Summary statistics30

4.2. Correlation32

4.3. Efficacy measurement results for 1996 to August 200834

4.4. Efficacy measurement results for different sub-period38

4.5. Efficacy measurement results for different market-place environments45

CHAPTER 5: CONCLUSION47

REFERENCES52

BIBLIOGRAPHY55

Questionnaire for Hedge Fund Investors57

Questionnaire for Mutual Fund Investors60

Figures64

Chapter 1: Introduction

Background of the Study

External shareholders and high net worth's personalities have put noteworthy total of money into hedge-funds, in search of elevated income as well as diversification profits assured by hedge-fund directors. Owing to the deficiency of steadfast data, educational discourse on hedge-funds in the 1990s was limited to evocative study and moderately simple efficacy metrics. Nevertheless, as added information and statistics have become accessible, more refined practices from quantitative finance have been applied to evaluate hedge-funds. One imperative tributary of this discourse has developed multifactor efficacy measurement forms classify the foundations of hedge-fund returns and detach the risk premiums from diverse investments (beta) and the alpha that hedge-fund executives offer. (Agarwal & Naik 2004)

Outline of the Study

The residue of the document is planned as follows. Section 2 covers the methodology, i.e., the six efficacy evaluating models we use in the experimental component. Section 3 presents our information and converses how we deal with the numerous facts biases intrinsic in hedge-fund data. In Section 4 we present our experiential answer, and we close in Section 5.

Chapter 2: Literature Review

Latest discourse illustrates that classical, linear efficacy measurement models repeatedly cannot incarcerate the active trading stratagems in the dissimilar benefit classes and market-places that numerous hedge-funds practice. Furthermore, hedge-funds utilize a mixture of trading strategies, so evaluating ...