Hedge fund performance appraisal using data envelopment analysis

Hedge fund performance appraisal using data envelopment analysis

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Article ID: iaor20061748
Country: Netherlands
Volume: 164
Issue: 2
Start Page Number: 555
End Page Number: 571
Publication Date: Jul 2005
Journal: European Journal of Operational Research
Authors: , ,
Keywords: investment, statistics: data envelopment analysis
Abstract:

In this paper we apply data envelopment analysis (DEA) to evaluate the performance of hedge fund classifications. The purpose of alternative investment strategies such as hedge funds is to offer absolute returns, so using passive benchmarks to measure their performance could be ineffective. With the increasing number of hedge funds available, institutional investors, pension funds, and high net worth individuals urgently need a trustworthy efficiency appraisal method. DEA can achieve this. An important benefit of the DEA measure is that benchmarks are not required, thereby alleviating the problem of using traditional benchmarks to examine non-normal distribution of hedge fund returns. We suggest that DEA be used as a complementary technique (or method) for the selection of efficient hedge funds and funds of hedge funds for investors. Using DEA can shed light and further validate hedge fund manager selection with other methodologies.

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