Essays on Hedge Fund Performance and Corporate Governance

The hedge fund industry aggregate is approximately US$ 3.61tn assets under management (Prequin, 2020). Despite the significance of these numbers and their potential effect on the global economic stability, the literature remains silent regarding domicile-strategic related aspects of performance, the differences in management style and performance between male and female managers, and the flow-performance relationship based on the ethnic association of the hedge fund manager. This doctoral thesis focuses on three original topics concerning hedge fund performance and corporate governance. The first topic examines the impact of geolocation and investment strategy on the estimation of risk in performance persistence measurement dynamics. Secondly, we analyse gender differences in hedge fund performance employing risk-adjusted performance metrics and two performance persistence models. Lastly, the third topic examines whether the ethnic association of the hedge fund manager can affect the investment choice of the hedge fund investor. This thesis reports strong performance persistence when analysing the individual domicile or strategy in line with previous findings. However, as we move to consider a combination of both domicile and the investment strategy, we can observe diminished persistence and its loss and reversal. These cross-comparison results indicate that the sole reliance on either domicile or the investment strategy clusters in isolation can be grossly misleading and lead to significant losses. In the sphere of gender differences, the findings indicate that both male and female hedge fund managers tend to produce similar risk-adjusted returns under the umbrella of lower-order statistics. However, with the incorporation of performance measures that account for hedge funds’ asymmetric returns distribution, female managers tend to produce lower returns than their male counterparts. These findings show that controlling for higher-order statistics is crucial in identifying gender differences in hedge fund performance. Further results reveal both positive and negative performance fluctuating between genders (with the dominance of statistically significant cases amongst male managers). Under the parametric approach, the performance persistence is dependent not only on managers’ gender but also on the adopted time horizon. More importantly, the results underline the importance of a diverse v approach, such as the deployment of risk-adjusted metrics and non/parametric persistence methods when analysing hedge funds performance. Lastly, the ethnic minority hedge fund managers receive significantly fewer capital inflows than their non-minority counterparts yet simultaneously deliver better (average) raw returns/performance. In addition to the regression-based approach, this part of the thesis also applies the risk-adjusted metrics to identify whether the investors’ choice is statistically justified. The risk-adjusted metrics results indicate fluctuation in the level of advantage exhibited by the two groups of hedge fund managers. The presented findings provide a unique contribution to the literature concerning race/ethnicity, hedge funds, and human behaviour. This doctoral thesis draws attention to the underdeveloped areas of the academic literature in the first place concerning hedge fund domicile and its investment strategy, managers’ gender and managers’ ethnicity. In all cases, it shows that the approach to the analysis requires creativity and accountability for statistical anomalies that are very often traditionally associated with hedge funds. Furthermore, it also indicates that the thorough analysis of hedge funds requires multiple approaches, often concentrating on the initial data formatting prior to the multi-layered main analysis. The results and the approaches taken in this thesis are directly relevant to both professional investors and academics.