Generalized runs tests to detect randomness in hedge funds returns |
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| Institution: | 1. Department of Internal Medicine, Wake Forest School of Medicine, Winston-Salem, NC, USA;2. Deparment of Medicine, Division of Cardiology, Emory University School of Medicine, Atlanta, GA, USA;3. Division of Cardiovascular Medicine, Henry Ford Hospital, Detroit, MI, USA;4. Department of Cardiac Imaging, King Abdul Aziz Cardiac Center, Riyadh, Saudi Arabia;5. Radiology and Imaging Sciences, National Institutes of Health, Bethesda, MD, USA;6. Department of Epidemiology and Cardiovascular Health Research Unit, University of Washington, Seattle, WA, USA;7. Department of Medicine, Division of Cardiology, Department of Radiology, Johns Hopkins University, Baltimore, MD, USA;8. Department of Internal Medicine, Section on Cardiology, Wake Forest School of Medicine, Winston-Salem, NC, USA;9. Epidemiological Cardiology Research Center (EPICARE), Department of Epidemiology and Prevention, Wake Forest School of Medicine, Winston-Salem, NC, USA |
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| Abstract: | The major contribution of this paper is to make use of generalized runs tests (Cho and White, 2011) to analyze the randomness, i.e. the lack of persistence, in both absolute and relative returns of hedge funds. We find that about 42% of the HFR universe exhibit iid absolute returns over the period spanning 2000 to 2012. These funds are mainly found in proportions within the Macro and Equity Hedge strategies. A similar result holds for relative returns. We also find that funds having non-iid returns often exhibit ARCH effects and structural breaks, with largest breaks located within financial crises. Also, only a small percentage displays persistence in their relative performance, 8.2% to 16.7% of the universe, mainly found in proportions within the Relative Value and Event-Driven strategies. The robustness of results is challenged by implementing the tests on a crisis-free period. We find similar results for absolute returns. For relative ones, differences appear across strategies and benchmarks, but still both ARCH and breaks are present. Our work contributes to the hedge fund literature in terms of methodology, portfolio allocation, and performance measurement. |
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| Keywords: | Hedge funds Randomness Persistence Generalized runs tests ARCH Breaks |
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