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Evaluating Hedge Fund Performance: A Stochastic Dominance Approach

  • Sheng Li
  • Oliver Linton

Abstract

We introduce a general and flexible framework for hedge fund performance evaluation and asset allocation: stochastic dominance (SD) theory. Our approach utilizes statistical tests for stochastic dominance to compare the returns of hedge funds. We form hedge fund portfolios by using SD criteria and examine the out-of-sample performance of these hedge fund portfolios. Compared to performance of portfolios of randomly selected hedge funds and mean–variance efficient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio.

Keywords

Hedge Fund Stochastic Dominance Sharpe Ratio Performance Persistence Hedge Fund Manager 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of FinanceLondon School of EconomicsLondonUK
  2. 2.Department of EconomicsLondon School of EconomicsLondonUK

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