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Evaluating hedge fund performance: a stochastic dominance approach

By Sheng Li and 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 e¢ cient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio

Topics: HF Commerce, HG Finance, HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:24486
Provided by: LSE Research Online

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