A key criterion for applying hedge accounting under SFAS 133 is the demonstration of hedge effectiveness. Retrospective assessment of hedge effectiveness may reveal hedge ineffectiveness – the extent to which a gain (loss) on the hedging derivative is not offset by a corresponding loss (gain) on the hedged item. SFAS 133 requires that this accounting measure of hedge ineffectiveness be reported...

This paper investigates hedge fund performance and risk. The empirical evidence indicates that hedge funds differ substantially from traditional investment vehicles such as mutual funds. The funds with watermarks significantly outperform the funds without watermarks. The average hedge fund returns are related positively to incentive fees, the size of the fund, and the lockup period. Hedge funds...

SEPTEMBER 2002 THE JOURNAL OF FIXED INCOME 1 H edge fund strategies came under intense scrutiny with the stressful market events surrounding the near collapse of Long-Term Capital Management (LTCM). Several studies were sponsored by regulatory agencies in the financial markets, including the President’s Working Group on Financial Markets [1999], and the Bank for International Settlements [1999a...

It is well known that the pro forma performance of a sample of investment funds contains biases. These biases are documented in Brown, Goetzmann, Ibbotson and Ross (1992) using mutual funds as subjects. The organization structure of hedge funds, being private and often offshore vehicles, makes data collection a much more onerous task. This amplifies the impact of performance measurement biases....

We consider rewriting systems for unranked ordered terms, i.e. trees where the number of successors of a node is not determined by its label, and is not a priori bounded. The rewriting systems are defined such that variables in the rewrite rules can be substituted by hedges (sequences of terms) instead of just terms. Consequently, this notion of rewriting subsumes both standard term rewriting a...

Over the last half decade, asset flows into hedge funds have surged, the number of funds has expanded exponentially, and new products have emerged which allow investors to obtain hedge fund exposure via structured transactions. To many, this is due to a paradigm shift in investment management and constitutes a modern financial revolution. However, to others, hedge funds are simply investment st...

H funds’ extensive use of derivatives, short selling, and leverage and their dynamic trading strategies create significant nonnormalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge fund portfolios. This paper uses the utility-based nonparametric and parametric performance measures to d...

This paper analyzes optimal investment decisions, in the presence of non-redundant hedge funds, for investors with constant relative risk aversion. Factor regression models with optionlike risk factors and no-arbitrage principles are used to identify and estimate the market price of hedge fund risk, the volatility coefficients of hedge fund returns and the correlation between hedge fund and mar...

In this paper we apply data envelopment analysis (DEA) to evaluate the performance of hedge fund classifications. The purpose of alternative investment strategies such as hedge funds is to offer absolute returns, so using passive benchmarks to measure their performance could be ineffective. With the increasing number of hedge funds available, institutional investors, pension funds, and high net...