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Dynamic Linkages between Hedge Funds and Traditional Financial Assets: Evidence from Emerging Markets

Roland Füss

Dieter G. Kaiser

Felix Schindler

Risk Management in Emerging Markets

ISBN: 978-1-78635-452-5, eISBN: 978-1-78635-451-8

Publication date: 29 December 2016

Abstract

This chapter aims to determine whether diversification benefits accrue from adding emerging market hedge funds (EMHFs) to an emerging market bond/equity portfolio, and subsequently whether the type of exposure hedge funds provide is justified by their fees. We use multivariate cointegration analysis to show that the advantages of adding hedge funds to balanced portfolios are limited for the three regions of Asia, Eastern Europe, and Latin America, as well as for the entire global emerging market universe. In summary, we find that emerging market hedge funds are generally redundant for diversifying long-only emerging market investment portfolios with long-term investment horizons. This result also holds when we extend our sample by the global financial crisis in 2008 and 2009 and allow for structural breaks according to the Gregory-Hansen (1996) test. Hence, even during the global financial crisis in 2008 and 2009, when risk diversification was most needed, long-term comovements between hedge funds and traditional assets is, with the exception of the Eastern European region, not disrupted. Because EMHF returns are heavily influenced by the emerging market equity and bond markets, we conclude that the “alpha fees” charged by EMHFs may not always be appropriate for the three main regions under consideration. This also holds, however, to a lesser extent, for a global diversification among hedge funds and traditional assets in emerging markets.

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Acknowledgements

Acknowledgments

We are grateful to Sabri Boubaker, Bonnie G. Buchanan, Duc Khuong Nguyen (editors), and an anonymous referee for valuable suggestions which have significantly improved this chapter. The authors are grateful to Zeno Adams, Greg N. Gregoriou, Daniel Hartmann, Theodore C. Moorman, Joachim Zietz for helpful comments and suggestions on previous versions of this chapter. We of course bear full responsibility for any remaining errors.

Citation

Füss, R., Kaiser, D.G. and Schindler, F. (2016), "Dynamic Linkages between Hedge Funds and Traditional Financial Assets: Evidence from Emerging Markets", Boubaker, S., Buchanan, B. and Nguyen, D.K. (Ed.) Risk Management in Emerging Markets, Emerald Group Publishing Limited, Leeds, pp. 543-583. https://doi.org/10.1108/978-1-78635-452-520161029

Publisher

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Emerald Group Publishing Limited