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The necessity to correct hedge fund returns: empirical evidence and correction method

Abstract : We study two principal mechanisms suggested in the literature to correct the serial correlation
in hedge fund returns and the impact of this correction on financial characteristics of their returns
as well as on their risk level and on their performances. The methods of Geltner (1993), its extension
by Okunev & White (2003) and of Getmansky, Lo & Makarov (2004) are realized on a sample
of 54 hedge fund indexes. The results show that the unsmoothing leaves the mean unchanged
but increases significantly the risk level of hedge funds, whether the risk is measured in terms of
the return standard-deviation or the modified Value-At-Risk. Funds' performances, measured by
traditional Sharpe ratio and Omega index decline considerably. By contrast, funds' rankings after
the unsmoothing unexpectedly change slightly. However, some notable modifications in ranks of
several funds are observed. The necessary transparency of the management practice requires that
such a correction must be systematically done.
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Preprints, Working Papers, ...
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Submitted on : Wednesday, October 31, 2007 - 11:29:17 AM
Last modification on : Wednesday, October 20, 2021 - 3:22:14 AM
Long-term archiving on: : Monday, April 12, 2010 - 1:03:19 AM


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  • HAL Id : halshs-00184470, version 1


Georges Gallais-Hamonno, Huyen Nguyen-Thi-Thanh. The necessity to correct hedge fund returns: empirical evidence and correction method. 2007. ⟨halshs-00184470⟩



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