An Examination of Hedge Fund Return Distributions

Abstract

This article examines the return distributions associated with hedge funds. It classifies hedge fund investment strategies into two groups: those with exposure to credit risk, and those with exposure to market risk. Hedge fund strategies with exposure to credit risk demonstrate large downside tails in the distributions of their returns, consistent with distributions of high-yield bonds. Hedge funds that take market risk have a return distribution consistent with that of large-capitalization stocks. Hedge funds with limited or no market and credit risk (market-neutral) have returns that approximate a normal distribution.