Document Type
Journal Article
Department/Unit
Department of Economics
Language
English
Abstract
We employ the stochastic dominance approach that utilizes the entire return distribution to rank the performance of Asian hedge funds as traditional mean-variance and CAPM approaches could be inappropriate given the nature of non-normal returns. We find both first-order and higher-order stochastic dominance relationships amongst the funds and conclude that investors would be better off by investing in the first-order dominant funds to maximize their expected wealth. By investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in hedge fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in a hedge fund's track record.
Keywords
Hedge funds, Stochastic dominance, Risk-averse investors, Performance measurement
Publication Date
2008
Source Publication Title
Pacific-Basin Finance Journal
Volume
16
Issue
3
Start Page
204
End Page
223
Publisher
Elsevier
Peer Reviewed
1
DOI
10.1016/j.pacfin.2007.07.001
Link to Publisher's Edition
http://dx.doi.org/10.1016/j.pacfin.2007.07.001
ISSN (print)
0927538X
Recommended Citation
Wong, Wing Keung, Kok Fai Phoon, and Hooi Hooi Lean. "Stochastic dominance analysis of Asian hedge funds." Pacific-Basin Finance Journal 16.3 (2008): 204-223.