The effect of alternative investment in hedge funds

Given that there is a growing emphasis in the field of alternative investment, this paper studies the effect of alternative investment in hedge funds and tests whether hedge funds that take positions in non-standard asset classes outperform hedge funds that take positions only in equity and fixed income securities. The Fung and Hsieh (2004) seven-factor model is used to analyse the hedge fund returns. The seven-factor model is first tested with a substitute factor as the original factor data ceased to exist by 2007, then is extended to cover 2000-2006, 2007-2010, 2011-2015 period to examine its explanatory power, and finally used to obtain the alpha return of the hedge funds. The alpha return will be separated into two groups, with verse without alterative investment exposure. The alphas are tested to see if there is any difference between the two groups. An empirical comparison base on pure return will also be presented. We observe that the funds which have weights in non-standard assets earned a statistically significant excess alpha than the funds without exposure during the 2007 to 2010 period. It is possible that funds with investment in the non-standard assets could outperform those without exposure in future.