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Should hedge funds deviate from the benchmark?

Panopoulou, Ekaterini and Nikolaos, Voukelatos (2022) 'Should hedge funds deviate from the benchmark?' Financial Management, 51 (3). pp. 767-795. ISSN 0046-3892

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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 pro le and various fund characteristics. This relative underperformance stems primarily from the higher subsequent risk exposure associated with pursuing a unique strategy. Our results are indicative of risk shifting by fund managers attempting to maximize the value of their compensation contracts.

Item Type: Article
Uncontrolled Keywords: Hedge funds; performance; benchmark deviations; managerial skill;
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 02 Nov 2021 11:34
Last Modified: 01 Nov 2022 02:00

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