Long‐Term Interdependence between Hedge Fund Strategy and Stock Market Indices

Roland Füss (Department of Empirical Research and Econometrics, University of Freiburg, Platz der Alten Synagoge, 79085 Freiburg, Germany)
Frank Herrmann (Department of Empirical Research and Econometrics, University of Freiburg, Platz der Alten Synagoge, 79085 Freiburg, Germany)

Managerial Finance

ISSN: 0307-4358

Publication date: 1 December 2005

Abstract

This study presents an investigation of the long and short‐term co‐movements between different hedge fund strategy indices and the stock markets of France, Germany, Japan, North America and the UK. To analyse relationships among these price indices, the EngleGranger methodology, based on bivariate testing for cointegration, and correlation analysis are conducted. The question of long‐term dependence instead of short‐term consideration is of particular interest, because portfolio optimization is based upon the cointegration of prices, rather than the correlation of returns. However, as is generally known, there is an information loss when returns are used instead of prices. Results indicate that there exists no station ary, long‐term relationship between the two as set groups. The overall suggestion is that opportunities exist to diversify an international portfolio by taking hedge funds into account. Moreover, this applies not only in terms of a limited time period, but also in the long‐run. Besides this main result, the augmented Dickey‐Fuller test statistics for cointegration residuals show quite different behaviour in comparison to the correlation co efficients. The values of the test statistics show that there seems to be a weaker tendency towards long‐term interrelation between hedge fund strategies and the US stock market. This applies even though average correlation co efficients among these assets exceed those of other combinations between stock and hedge fund indices.

Keywords

Citation

Füss, R. and Herrmann, F. (2005), "Long‐Term Interdependence between Hedge Fund Strategy and Stock Market Indices", Managerial Finance, Vol. 31 No. 12, pp. 29-45. https://doi.org/10.1108/03074350510770008

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Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited

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