Abstract
This article proposes a two-stage peer group benchmarking approach to evaluate the performance of hedge funds. We present different ways of orthogonalizing the peer group benchmarks and discuss their general properties. We then orthogonalize the relevant benchmarks against predetermined exogenous factors. For a broad dataset we show that this approach captures much more commonalities in hedge funds returns when compared with the standard methodology of using exogenous factors only. As a consequence, the empirical rankings of hedge funds, on the basis of alphas, change considerably. Therefore, the proposed two-stage peer group benchmark allows us to identify which hedge fund managers outperformed their cohorts.
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We are grateful to the Tasmanian School of Business and Economics, University of Tasmania for funding Marco Wilkens’s visit to the Discipline of Economics and Finance, University of Tasmania, Hobart in January 2012 to undertake the collaborative work. We would also like to thank the Discipline of Finance, Business School, University of Sydney for hosting Marco’s follow-on visit to Sydney in February 2012. Additionally, we would like to acknowledge Martin Rohleder, University of Augsburg, for his helpful comments and suggestions. We are solely responsible for any remaining errors.
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Wilkens, M., Yao, J., Oehler, P. et al. Evaluating the performance of hedge funds using two-stage peer group benchmarks. J Asset Manag 16, 272–291 (2015). https://doi.org/10.1057/jam.2015.3
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DOI: https://doi.org/10.1057/jam.2015.3