The hedge fund return puzzle. A macroeconomic explanation

PhD ceremony: Mr. B.A. Boonstra, 14.45 uur, Academiegebouw, Broerstraat 5, Groningen

Title: The hedge fund return puzzle. A macroeconomic explanation

Promotor(s): prof. R.A.H. van der Meer, prof. E. Sterken

Faculty: Economics and Business

In its recorded history hedge funds have generated puzzlingly large risk adjusted returns which cannot be explained by classical capital asset pricing theory. Unlike most hedge fund research, which focuses on microeconomic and organizational issues, this thesis investigates hedge fund returns solely by means of a macroeconomic perspective. In the macroeconomic view the raison d‘être of hedge funds is not only explained, but a comprehensive approach on explaining the large observed risk adjusted returns is also proposed.

In the macroeconomic perspective capital markets are characterized by the phenomenon of incomplete equitization. In incompletely equitized markets, imperfections lead to a failure in trading, i.e. in selling and in buying financial claims on future income and consumption streams. Henceforth, consumers cannot fully diversify consumption risk, as optimally desired. In their effort to reduce consumption risk, consumers turn to financial intermediaries, and to hedge funds in particular, organized to facilitate them in transferring and reducing the unwanted unequitized exposures.

Albeit the thesis is fully geared to macroeconomic explanations for hedge fund returns, it is believed that the theory offers additional insights into the hedge fund industry which, especially in today’s capital market environment, may be of use to practitioners in the field. In particular investors, such as fund of hedge funds, with a top-down macroeconomic asset allocation view may find value in this perspective.