On the Performance of Alternative Investments : CTAs, Hedge Funds, and Funds-of-Funds
- Topics:
- Commercial Lending
- Tags:
- Finance,
- Financial Services,
- Hedge Fund,
- Investment,
- Performance
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Overview: This paper discusses the alternative investment vehicles such as hedge funds, funds-of-funds, and commodity trading advisors (CTAs) by investigating their performance, risk, and fund characteristics. It focuses on them not only on a stand-alone basis but also on a portfolio basis. Several interesting results were found. First, CTAs differ from hedge funds and funds-of-funds in terms of trading strategies, attrition rates and survivorship bias, liquidities, and correlation structures in different market environments. However, funds-of-funds are similar to hedge funds in these dimensions. Second, during the period of 1994 to 2001, hedge funds outperform funds-of-funds, which in turn outperform CTAs on a stand-alone basis. The double fee structure but not survivorship bias can explain these results. Third, correlation structures for alternative investment vehicles are different under different market conditions. Hedge funds are highly correlated to each other and are not well hedged in the down markets with liquidity squeeze. The negative correlations with other instruments make CTAs suitable hedging instruments for insuring downside risk. When adding CTAs to the hedge fund portfolio or the fund-of-fund portfolio, investors can benefit significantly from the risk-return trade-off.
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Format: HTML & PDF | Size: 200KB | Date: Apr 2003 | Pages: 59
