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Conditional performance evaluation and style analysis: The case of hedge funds and managed futures

Bhaswar Gupta, University of Massachusetts Amherst


The inability of traditional models to account for time-varying estimates has led to conditional models being adopted for performance evaluation. In this dissertation I use the conditional models of Ferson and Schadt [1996] and Christopherson, Ferson and Glassman [1998] and the CISDM Alternative Investments Database to evaluate the performance of hedge funds and managed futures. One of the advantages of the CISDM alternative investment database is its defunct funds component. I use both components to construct a dataset that is free of survivorship bias. I focus on four major issues related to the CISDM alternative investment database and hedge funds and managed futures. The first issue relates to the characteristics of the defunct funds component. It is well known that it consists of funds that have stopped reporting for reasons other than going out of business, although poor performance is the primary reason for disappearance. The CISDM database reports the reasons due to which funds stop reporting. I checked my quantitative results against this information and found consistency in most cases. The second issue I focus on is performance evaluation and market timing. I find that while portfolios of active funds exhibit significantly positive alphas, most dead fund portfolios do not. I also investigate the market timing ability of these portfolios. My results validate that hedge funds pursue short-volatility strategies. The third issue relates to the performance of managed futures. I use the models of Ferson and Schadt [1996] to estimate excess return alphas for 78 CTAs that had complete data for the period 1993–2003. I find that the MFSB indices that were used as proxies for the market were remarkably effective in evaluating performance of managed futures. Finally I examine out-of-sample performance. I evaluate the performance of hedge fund portfolios constructed by ranking commonly used risk measures. I find that in most cases performance of ranked portfolios vary considerable and conclude that investors should exercise caution when constructing portfolios based on the measures. I also conclude that standard deviation is remarkably consistent over time compared to other measures.

Subject Area


Recommended Citation

Gupta, Bhaswar, "Conditional performance evaluation and style analysis: The case of hedge funds and managed futures" (2005). Doctoral Dissertations Available from Proquest. AAI3179879.