An Analysis of Hedge Fund Strategies

456 Pages·2007·1.98 MB·English

An Analysis
of Hedge Fund Strategies

Daniel P.J. CAPOCCI
HEC-ULG Management School – University of Liège
(Belgium)

PhD Thesis in Management
A mon petit Louis

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An Analysis of Hedge Fund Strategies

by Daniel P.J. CAPOCCI
Senior Portfolio Manager – Kredietbank Luxembourgeoise S.A.
HEC-ULG Management School – University of Liège (Belgium)
Luxembourg School of Finance – University of Luxembourg
EDHEC Risk and Asset Management Research Center
An Analysis of Hedge Fund Strategies – Table of Contents

Acknowledgements..............................................................................................i
An Analysis of Hedge Fund Strategies - Abstract..................................................i
Preface................................................................................................................ii
Introduction and Purpose....................................................................................1

Analysis of Hedge Fund Performance ................................................................45
Hedge Fund Performance and Persistence in Bull and Bear Markets................120
The Sustainability of Hedge Fund Performance: New Insights.........................190
The Neutrality of Market Neutral Funds...........................................................273
Diversifying using Hedge Funds: A Utility-Based Approach..............................339
General Conclusion.........................................................................................405
An Analysis of Hedge Fund Strategies – Table of Contents

References......................................................................................................410
An Analysis of Hedge Fund Strategies – List of Figures ...................................424
An Analysis of Hedge Fund Strategies – List of Figures ...................................425
An Analysis of Hedge Fund Strategies – List of Tables.....................................426
An Analysis of Hedge Fund Strategies – Detailed Table of Contents................431
An Analysis of Hedge Fund Strategies – Detailed Table of Contents................431

Acknowledgements
I would like to thank sincerely everyone that helped me directly and indirectly
during my work on this thesis. I will start by thanking my parents, Christine Wenders and
Nazzareno Capocci for their constant support.
I would also like to thank my boss, Patrick Vander Eecken, my sweetheart Renata
Vitórica as well as all the authors, anonymous referees and conference participants
(European Investment Review – 2003 and 2004, Global Finance Conference – 2005,
Institutional Fund Management – 2006) for their constructive and helpful comments on
my work. In particular, I would like to thank Vikas Agarwal, Naratip Balajiva, Jean-Marc
Brisy, David Capocci, Mark Carhart, Gabriel Catherin, Kenneth French, Greg N.
Gregoriou, David Hsieh, Bing Liang, Loistl Otto, Narayan Naik, Roger Otten, Magali
Thelen and Dee Weber. I would also like to thank Frédéric Duquenne for using his
impressive programming capabilities to help me finalise my final study.
Last but certainly not least, I would like to thank the members of my doctoral
committee and particularly my co-supervisors Georges Hübner, who worked with me on
several studies and who showed me the way on several occasions, as well as Albert
Corhay who provided constructive remarks on my papers.
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An Analysis of Hedge Fund Strategies - Abstract
This PhD thesis analyses hedge fund strategies in detail by decomposing hedge
fund performance figures. Our aim is to present hedge funds, to understand what
managers expect to do and to understand how they make or destroy value over time. In
order to achieve this objective, we develop a multi-factor performance analysis model,
use it over several time periods and improve it over time. This model aims to determine
both whether hedge funds create pure alpha over time (alpha over classical markets) and
whether there is persistence in hedge fund returns over time. Following this, I analyse
another specific aspect of hedge funds, their neutrality relative to equity markets in order
to validate hedge fund managers’ claims that they are market neutral. Finally, we
develop new efficient frontier measures, which not only include returns and volatility, but
also skewness and kurtosis in order to determine whether hedge funds are really
beneficial to investors.
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