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The Alpha and Omega of Fund of Hedge Fund Added Value

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Date
2012-04
Dewey
Economie financière
Sujet
Funds of hedge funds; Performance attribution model; Strategic allocation; Active management; Kalman filter
JEL code
C23; G11
Journal issue
Journal of Banking and Finance
Volume
36
Number
4
Publication date
04-2012
Article pages
1067-1078
Publisher
Elsevier
DOI
http://dx.doi.org/10.1016/j.jbankfin.2011.10.021
URI
https://basepub.dauphine.fr/handle/123456789/8447
Collections
  • DRM : Publications
Metadata
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Author
Darolles, Serge
Vaissié, Mathieu
Type
Article accepté pour publication ou publié
Abstract (EN)
In spite of a somewhat disappointing performance throughout the crisis, investors are showing interest in hedge funds. Still, funds of hedge funds keep on experiencing outflows. Can this phenomenon be explained by the failure of fund of hedge fund managers to deliver on their promise to add value through active management, or is it symptomatic of a move toward greater disintermediation in the hedge fund industry? We introduce a return-based attribution model allowing for a full decomposition of fund of hedge fund performance. The results of our empirical study suggest that funds of hedge funds are funds of funds like others. Strategic allocation turns out to be a crucial step in the investment process, in that it not only adds value over the long-term, but most importantly, it brings resilience precisely when investors need it the most. Fund picking, on the other hand, turns out to be a double-edged sword.

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