SP500 Hedge Fund Performance Evaluation Hedge Fund Performance Evaluation Your investment team works in an investment advisory firm, providing services to

SP500 Hedge Fund Performance Evaluation Hedge Fund Performance Evaluation

Your investment team works in an investment advisory firm, providing services to a university endowment interested in investing in hedge funds. The endowment requests you to evaluate the historical hedge fund performance. To meet the client request, you team will write a detailed report on hedge fund performance evaluation over the period from January 1994 to December 2018.

In particular, your team has decided to use the hedge fund indexes compiled by the Credit Suisse, which are net of fees and expenses, to measure hedge fund returns. Your performance report will cover the following indexes:

1. Credit Suisse Hedge Fund Index,
2. Credit Suisse Convertible Arbitrage Hedge Fund Index

3. Credit Suisse Dedicated Short Bias Hedge Fund Index

4. Credit Suisse Emerging Markets Hedge Fund Index

5. Credit Suisse Equity Market Neutral Hedge Fund Index

6. Credit Suisse Event Driven Hedge Fund Index,
7. Credit Suisse Fixed Income Arbitrage Hedge Fund Index

8. Credit Suisse Global Macro Hedge Fund Index,
9. Credit Suisse Long/Short Equity Hedge Fund Index

10.Credit Suisse Managed Futures Hedge Fund Index

11. Credit Suisse Multi-Strategy Hedge Fund Index.

Your report should contain the following components:

Hedge Fund Beta

To measure the systematic risk of hedge funds, you compute the market beta for each hedge fund index. To account for potential biases due to the illiquidity of hedge fund returns, you include not only the contemporaneous but also lagged S&P500 returns during the past three months in beta estimating regressions. You add up the four beta estimates to compute the total market risk for each hedge fund index. Does the result make sense to you?

Note:

1) Information on the one-month Treasury bill rate (risk-free rate) and the S&P500 Index returns can be obtained from the FRED, e.g., https://fred.stlouisfed.org/series/SP500.
2) The performance of the hedge fund indexes can be downloaded from the Credit Suisse website: https://lab.credit-suisse.com/#/en/index/HEDG/HEDG/overview.