Changes in hedge fund risk and performance across styles: 2004-2010

We examine the constancy of the Capital Asset Pricing Model (CAPM) coefficients for 17 hedge fund indices over the years 2004 to 2010.  The indices represent specific strategies within four distinct hedge-fund styles. The four styles are the emerging-market style, the equity-hedge style, the event-driven style, and the relative-value style.  We apply ordinary least squares analysis and Chow tests to returns data obtained from Hedge Fund Research, Inc. The results indicate that the coefficients changed for each index during the sample period and that most of the changes occurred during the 2008 financial crisis.  We apply a sequence of Chow tests to each series to determine the most likely date the regime change occurred, as indicated by the highest F-statistic, and find that the most likely date varies from hedge fund to hedge fund.  However, there is some uniformity among the funds within each style.  In general, furthermore, those indices that have later regime changes have better performance over the entire sample.  As a group, for example, the emerging-market indices have the latest regime changes and they have the highest average returns.  For all the hedge funds, there is a strong relationship between return and risk, and most indices outperformed the S&P 500 index over the entire sample and in the period before and the period after the crisis.  Most of the indices have improved risk-adjusted performance in the later period.  Observing the extent of the changes in relationships and the timing of the changes will help researchers and practitioners better understand the properties of hedge fund returns relative to the overall financial markets.