Hedge Fund Returns

Abstract

The authors start with the observation that hedge fund returns are not really superior to the returns on traditional asset classes, but primarily just different, and thus that hedge funds are no longer sold on the promise of superior performance, but more and more on the back of a diversification argument. They present the critical question as the following: Is it possible to generate hedge fund-like returns ourselves by mechanically trading stocks and bonds (either in the cash or futures markets)? To answer that question, they present work which has led to the development of a general procedure that allows us to design simple trading strategies in stock index, bond, currency, and interest rate futures that generate returns with statistical properties that are very similar to those of hedge funds, or any other type of managed fund for that matter.