Examination of the Fees and Performance Structure of Fixed Income Arbitrage Hedge Funds

This article aims at testing empirically the major building blocks that affect the performance of fixed income arbitrage hedge funds: incentive fees, management fees, size, age, hurdle rate, high watermark provision and lockup period. These funds engage principally in arbitrage strategies in the global corporate debt securities markets taking advantage of mispricings. Fixed income arbitrage funds take advantage of mispricing between fixed – income securities. Hedge fund managers open two positions at the same time to eliminate losses. A short and a long position aim to take advantage for price differences in the traded fixed – income securities. Government or municipal, corporate bonds and credit default swap are used to leverage the fund's return. They use derivatives product to hedge against credit risk. Another strategy is yield curve arbitrage and credit yield curve. The profit or loss is resulted from studying the difference between a short 3 month US bond and long term 10 year US bond yield curve. Sometimes, they use mortgage backed securities arbitrage.The sample is provided from Data Feeder dataset. It is very comprehensive and includes fixed income arbitrage hedge funds for the period 1998 to 2003. There are other factors that could contribute to performance persistence such as lock-up periods, hurdle rate and high water mark.We are going to use a probit binary regression equation to test the factors that create performance persistence