Interpretations on Extreme Returns in the Canadian Hedge Fund Market

Inspired by the award winning paper, Are Extreme Returns on Hedge Fund Portfolios Problematic for Investors (Brulhart and Klein, 2006) we analyzed the nature of extreme returns in the Canadian hedge fund market. Although much has been written on this topic for US and global hedge funds, no one has studied the nature of extreme returns in the still developing Canadian hedge fund market before. We find that the hedge fund returns are generally more favourable than that of major equity and bond indices from the perspective of mean-variance measures. As in Brulhart and Klein (2006), the standard measures of skewness and kurtosis can provide misleading insight, or lead to incorrect conclusion about higher order risks. In his paper, we interpret the extreme return in two perspectives by considering the moments of higher order as well as the magnitude and duration of drawdown period. Last but not the least, we conduct a comparison of de-levered returns on the various indices and find that investors should be surprised by the results but in a pleasant way.