Evaluating the Performance of Hedge Fund Strategies : A Non-Parametric Analysis

We seek evidence that top performing hedge funds follow a different strategy than mediocre performing hedge funds by examining the structure of significant risk factors that explain the out of sample excess net returns. Consequently, we examine the out of sample returns of hedge funds to determine, first, if hedge funds have outperformed the market in recent years, second, whether top funds actually outperform mediocre performing hedge funds and thirdly, whether top funds have a different risk profile than mediocre hedge funds and therefore appear to follow a different strategy. We find that the risk profile of top quintile performing funds is distinctly different than mediocre quintile funds by having fewer risk factors that appear to anticipate the troubling economic conditions that prevailed after 2006