Evaluating Hedge Fund Performance

Foreword

Many misconceptions exist about hedge funds and the hedge fund industry. Few investors know that hedge funds have now existed for almost 60 years. Few investors know that the term hedge fund refers more to the legal vehicle (private pool of capital) that houses the underlying strategy than the strategy itself. Most investors view hedge funds primarily as “absolute return” investments in which managers seek to obtain extreme positive returns in all market environments. Often the press has portrayed hedge funds as extremely risky investments.

In Evaluating Hedge Fund Performance, Dr. Tran attempts to remove these misconceptions. Instead, he emphasizes the risk reduction role of hedge funds when combined with traditional stock and bond investments. Dr. Tran points out that for most of the past 15 years, most hedge fund strategies have underperformed the S&P 500. This should come as little surprise to investors. The lower return achieved by most hedge fund strategies is consistent with their lower risk. Most investors fail to realize that return variability of the typical hedge fund is less than that of the typical equity investment.

The role of hedge funds as a risk diversifier is a primary focus of this book. The last free lunch of investment rests not in hedge fund investment per se but in combining hedge funds with other traditional assets. The first chapters remind investors that long-term investment does not necessarily remove investment risk. For long time periods, ...