Performance and neutrality of market neutral hedge funds:evidence during the financial crisis

• Main Author: Vuoti, N. (Netta)
• Format: Dissertation
• Language: English
• Published: University of Oulu 2018
• Subjects: Finance
• Online Access: http://urn.fi/URN:NBN:fi:oulu-201806062461; http://nbn-resolving.de/urn:nbn:fi:oulu-201806062461

Hedge funds are able to follow unconventional and dynamic trading strategies that are out of reach for traditional investment vehicles. One of these dynamic trading strategies is market neutral strategy, which aims at providing good and stable returns while simultaneously neutralizing exposure towards the market. Market neutral hedge funds are expected to perform well regardless of market conditions and this thesis focuses on analyzing, whether these funds deliver on their definition during the financial crisis of 2008. We study the performance and persistence of returns generated by market neutral hedge funds, as well as present the results of neutrality analysis during the financial crisis. The data is obtained from Lipper TASS hedge fund database and the model applied in this study is the capital asset pricing model. Results indicate that market neutral hedge funds are able to outperform the market during the financial crisis. However, they are not able to generate positive returns or statistically significant alpha. Based on the most common neutrality measures, market neutral hedge funds do not show neutrality towards the declining markets. Only a quarter of market neutral hedge funds are able to pass the mean neutrality test during the financial crisis. According to analysis in deciles, few hedge funds are able to generate positive returns during the crisis while maintaining a moderate negative exposure towards the market.