Selection and Performance Analysis of Asia-Pacific Hedge Funds

Abstract

Hedge funds that invest in Asia-Pacific markets have grown rapidly in recent years. Asia-Pacific focused hedge funds are poised to play a bigger role in investor portfolios judging by the growing number of investment companies that are based in the Asian region. This article examines the skew and kurtosis of Asia-Pacific hedge fund returns, and tests the hypothesis that they are normally distributed. The results indicate that the distribution of returns are not necessarily Gaussian, but instead exhibit fat tail characteristics. As such, standard deviation itself is insufficient to capture the full risks inherent within these funds. In order to account for fat tail distributions this article uses conditional value-at-risk (CVaR) and conditional drawdown (CDD) to assess the impact of negative tail risks of hedge funds. Further an optimal portfolio of hedge funds is constructed that is subject to constraints on CVaR and CDD.