Application of a Logit and Probit Regression to Test if High Water Marks, Incentive Fees and Lock-Up Periods of an Emerging Hedge Fund Category Affects Performance

In this article, we apply a logit and probit regression to test high water marks, incentive fees and lock-up periods of emerging hedge funds category. Emerging markets hedge funds invests primarily in countries that have a closed market economy and are in the process of developing and expanding its infrastructure such as Brazil, India, Latin America, Africa, Eastern Europe, Korea and China. Hedge funds use in addition to stocks and bonds a mixture of derivatives products such as commodity futures, forward contracts, fixed-income instruments, currency and index options to take advantage from the leverage effect due to substantial increase or decrease of prices. Therefore, the risk in emerging economies is higher for potential losses and gains. The sample is provided from Data Feeder dataset. It includes emerging markets hedge funds for the period 1990 to 2003. By applying the logit and probit model, we find that high water marks, incentive fees and lock-up periods are statistically significant and affect the performance of emerging hedge funds