Should Hedge Funds Deviate from the Benchmark?

81 Pages Posted: 30 Oct 2017 Last revised: 6 Jul 2021

Date Written: March 4, 2019

Abstract

We examine the relationship between deviating from the benchmark and subsequent performance for hedge funds. We propose a simple new measure of benchmark deviations, termed the Dispersion Contribution Index (DCI), which is based on a fund's return-distance from the mean return of same-style funds. We find that funds which deviate the most from their benchmark tend to underperform relative to their less distinctive peers, after accounting for their risk profile and various fund characteristics. This relative underperformance stems primarily from the higher subsequent risk exposure associated with pursuing a unique strategy.

Keywords: Hedge funds; performance; benchmark deviations; managerial skill

JEL Classification: G10, G11, G23

Suggested Citation

Panopoulou, Ekaterini and Voukelatos, Nikolaos, Should Hedge Funds Deviate from the Benchmark? (March 4, 2019). Available at SSRN: https://ssrn.com/abstract=3060993 or http://dx.doi.org/10.2139/ssrn.3060993

Ekaterini Panopoulou

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Nikolaos Voukelatos (Contact Author)

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom
0044 (0) 1227827705 (Phone)

HOME PAGE: http://https://www.kent.ac.uk/kbs/profiles/staff/voukelatos_nikolaos.html

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