University of Oulu

Hedge fund strategies, risks and benchmarking during several financial crises

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Author: Joamets, Rasmus1
Organizations: 1University of Oulu, Oulu Business School, Department of Finance, Finance
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.9 MB)
Pages: 99
Persistent link:
Language: English
Published: Oulu : R. Joamets, 2021
Publish Date: 2021-05-21
Thesis type: Master's thesis
Tutor: Oikarinen, Elias
Reviewer: Simonen, Jaakko
Oikarinen, Elias


The goal of this Master’s thesis is to compare and understand different types of hedge fund strategies, the risks, and returns included within hedge funds, and how hedge funds can be benchmarked against the market returns. In addition to this, the performance of hedge funds during crises is evaluated. The main risks that this thesis addresses regarding the hedge funds industry are systematic risks, credit risks, tail risks, liquidity risks, and other risks embedded within the hedge fund industry. Several main crisis periods are defined in this study, namely the crises of 1998, 2001, 2008, and 2020 and the overall time period included in this thesis is between January 1997 and November 2020.

Hedge funds are described as alternative investment methods. What makes them alternative compared to traditional investment methods (such as investing in stocks and traditional funds) is the ability to follow and apply unconventional trading strategies such as futures, swaps, options and, arbitrage. One particular trait of hedge funds is the ability to reach different types and levels of risks through various exposures to markets, combined with different betas and alphas. The principal data employed in this thesis is obtained from BarclayHedge and the model applied to study the return movements of hedge fund strategies against the market returns is the capital asset pricing model. Main research questions within this thesis pursue to answer a) whether overall hedge fund performance is market neutral and positive even during the periods of financial turmoil, b) whether hedge funds are able to capture excess alpha and differentiated beta exposures during financial crises, c) furthermore, this thesis pursues to answer questions concerning genuine risks affecting hedge funds’ ability to create value and gain profits.

The results indicate that when compared to normal time periods, most hedge fund strategies are in fact not able to create statistically significant excess alpha during several financial crises. Furthermore, even though measurements of hedge fund neutrality such as beta coefficients and correlation are seemingly small during times of market tranquillity, values increase promptly during financial crises. Therefore, questioning the neutrality of hedge fund strategies and the actual level of hedging during financial crises is in place.

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Copyright information: © Rasmus Joamets, 2021. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.