The Performance of Hedge Fund Strategies and the Asymmetry of Return Distributions


  • We thank Ryan Davies, Christophe Faugere, Lester Hadsell, Roberto Savona, Mila Getmansky, David Smith, Mike Stutzer, Russ Wermers, Youchang Wu, and seminar participants at 2005 FMA European Conference in Siena, 2005 FMA annual meeting in Chicago, and SUNY at Albany for valuable comments and suggestions on earlier drafts of this paper. We especially thank John Doukas (the editor), Bing Liang (special issue editor) and an anonymous referee for comments and suggestions that substantially improved the paper. All errors remaining are the sole responsibility of the authors. Correspondence: Hany Shawky.


We present hedge fund performance estimates that adjust for stale prices, Fama-French risk factors and skewness. We contrast these new performance estimates with traditional performance measures. Using three-factor models to adjust for staleness in prices and to incorporate Fama-French factors along with the Harvey-Siddique (2000) two-factor model that incorporates skewness, we find that for the period 1990–2003, all hedge fund categories achieve above average performance when measured against an aggregate market index. More significantly, however, when we estimate performance at the individual hedge fund level, we discover that only 40 to 47% of the funds are shown to achieve an above average performance over that time period depending on the model used. These results have important implications for investors, endowments and pensions when they choose hedge fund managers.