1 / 9

Performance Persistence of Short-Biased Hedge Funds

Performance Persistence of Short-Biased Hedge Funds. Meredith A. Jones. Reading questions. What is the difference between a short-biased hedge fund and a pure short seller? What benefits do short-biased funds purport to offer over a pure short seller?

carl-hancock
Download Presentation

Performance Persistence of Short-Biased Hedge Funds

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Performance Persistence of Short-Biased Hedge Funds Meredith A. Jones

  2. Reading questions • What is the difference between a short-biased hedge fund and a pure short seller? • What benefits do short-biased funds purport to offer over a pure short seller? • What factor(s) have most impacted the performance of short-biased hedge funds over the past ten years? • Have short-biased hedge funds added value over selected market indices over the past ten years? • Looking forward, does it seem likely or unlikely that the performance of short-biased hedge funds will persist? • What benefits do short-biased hedge funds add to diversified portfolios? • What kind of “insurance premium” should investors expect to pay for these benefits?

  3. Summary • This paper investigates the historical and forward simulated performance persistence of short-biased hedge funds and attempts to establish their value in a diversified portfolio. • A short-biased hedge fund index (SBI) is constructed from multiple data sources to provide a historical return stream for analysis. • Traditional statistical analysis, Monte Carlo simulations, multi-factor forward stress testing and asset allocation models are used to draw conclusions.

  4. Historical Performance of SBI

  5. Historical Performance of SBI vs. Market Indices

  6. Forward Simulations of the SBI Monte Carlo simulations (below) and multi-factor forward stress testing were used to determine that performance is likely to persist in the future.

  7. Portfolio Simulations with SBI A portfolio maximizing low risk was constructed using traditional investments, global hedge funds, commodity trading funds and the SBI with possible inputs was created. The recommended allocation to the SBI was 21.7%. The insurance premium over the highest return portfolio was approximately three percentage points.

  8. Portfolio Simulations without SBI A portfolio maximizing low risk was constructed using traditional investments, global hedge funds, commodity trading funds but not the SBI with possible inputs was created. The return for this portfolio was approximately one percentage point higher than the SBI portfolio, but drawdown and standard deviation increased dramatically, making the insurance premium approximately one percentage point.

  9. Conclusion • The past performance of short-biased hedge funds has been remarkably consistent, with patterns consistent with the correlation and beta profiles. • Over the past 10 years and several different market scenarios, short-biased managers have been able to generate alpha over the market indices. • It appears that short-biased hedge funds have the potential to perform in a similar manner going forward, based on both Monte Carlo simulations and multi-factor stress testing. • Based on their individual risk-reward mandate and view of the market, it may make sense to maintain a permanent allocation to short-biased hedge funds since the “insurance premium” for doing so is relatively low.

More Related