Performance of Hedge Funds in the European Market

Sammanfattning: The aim of this paper is to investigate the performance of hedge funds during the period between December 1999 and March 2012. We consider 8 different investment styles for the European market. As it has been argued in several papers hedge funds differ from traditional funds, since it allows for diversification and lower systematic risk. Previous studies show inconclusive results regarding whether hedge funds are able to beat the market. In order to find evidence for the existence of abnormal returns for the hedge funds we regress 3 different asset pricing models, static CAPM, Fama-French three factor model and dynamic Multi-factor model. In line with our expectations the Multi-factor model is better suited to capture the dynamic risk exposures of the hedge funds since it includes additional risk factors as well as instrumental variables, taking into account the effects of the business cycles. We investigate the performance of the hedge funds in 3 different sub-periods and find that for some of the investments strategies it is possible to obtain positive anomalies in returns. However, the empirical results demonstrate that the number of significant alpha’s from the various models change over time and strategies.