Shocked researchers find “mutual funds and hedge funds of funds are actually not that different”
| Sep 28th, 2010 | Filed under: Academic Research, Hedge Fund Industry Trends, Today's Post | By: Alpha Male |
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In an era when funds of hedge funds have suffered wilting criticism about their fees and recent performance, there is some good news to report. A study by researchers at Lyxor Asset Management recently concluded that:
“…the out-flows from funds of hedge funds that we keep on observing cannot be attributed to a collective failure of funds of hedge funds’ managers to deliver on their promises.”
The paper, “Do funds of hedge funds really add value?” was penned jointly by Serges Darolles and Mathieu Vaissie. The duo decomposed fund of funds (FoF) returns into three components: returns resulting from strategic (static) asset allocation, returns resulting from tactical (dynamic) asset allocation, and returns derived from picking the best hedge fund managers within each hedge fund strategy.
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It is best to be a little skeptical about the bent line in the top plot of Exhibit 13. Where the bend is placed (and if there is one) can have a significant effect on our perception. One way of getting a more informative model would be to use a non-parametric regression, for example ‘loess’ in R. The variability of the fit could be found by doing it several times on bootstrap samples of the data.
I find it intriguing that the authors believe the HFR composite indices to be asset-weighted, when they are in fact equal-weighted. Research should be taken seriously.