A Study on the Performance of Hedge Fund and Market -Timing -Ability

The fund manager always pronounces “the high returns from hedge fund are along with low risk. Is the performance of hedge fund manager really good? In this study, the market-timing ability and performance consistency on hedge fund manager are tested. The Sharpe ratio was employed to implement the consistency of performance for mutual fund in the previous literature. Due to the non-normally distributed of returns of financial assets, the adjusted Sharpe ratio is employed in this study. As Dowd (1999) suggested, the adjusted Sharpe ratio in which the true risk is evaluated by value at risk (VaR). In the period of Asian flu and (Long Term Capital, LTCM) event, we found the hedge fund returns shocked badly, but it is not significant. Although the hedge funds performance is positive correlation during pre and post-term, but it is not significant. The change in structure of the hedge fund returns is hardly found. It also shows that hedge fund manager could rapidly react. Moreover, we found performance consistency for the hedge fund, despite that the manager does not have market-timing ability. The result was contradictory. The reason could be attributed to “bonus” system, the hedge fund manager could get “incentive fee”, and it is run up to 20%. Perhaps, the hedge fund manager will seek achievement to lead to market-timing ability not well. According to the adjusted Sharpe ratio, we found the Event-driven risk arbitrage median hedge fund could provide better performance to investors, no matter when the investors invest, they will get higher profit.