Performance factors in the Hedge Fund Industry

Alternative investments are a new but fast growing phenomenon in the South Africanmarket, hedge funds in particular were introduces to our market in the year 2000.Assets under management by hedge funds have enjoyed fast growth over the yearsrelative to assets managed by mutual funds. Including hedge funds in an investmentportfolio represents a unique proven opportunity for pension funds to protect theirinvestments during bear markets. Unfortunately only a limited number of investors outside the industry understandwhat factors drive returns in hedge fund strategies. The hedge fund industry is still amystery to many investors who as a result have not been able to take advantage ofabsolute returns generated through investing in hedge funds. This quantitative research aimed to determine which dominant factors drive strategyaggregate returns in the Hedge Fund Industry through correlation. It also aimed toanalyse regression of these factors to returns on different strategies as well asamong themselves. Lastly to develop models of hedge fund aggregate returns byequity strategy using the Arbitrage Pricing Theory (APT) model. Results of the research show that the Mid Cap index is the primary driver of equitystrategies selected in this research. The Long Short interest rates as the secondarydriver, the Long Bias has the small cap index and global markets as the secondarydriver, for the Market Neutral strategy has a short position in small caps as itssecondary performance and resource indices are the secondary performance driversfor the Global Macro strategy. Copyright © 2009 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria. Please cite as follows: Khalaki, L 2009, Performance factors in the hedge fund industry, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-04082010-121647/ > G10/315/ag