Measuring and Comparing the Risk Adjusted Performance, the Correlation and the Covariance of Global Macro Funds and Funds of Funds

In this article, we measure and compare the risk adjusted performance, the correlation and the covariance of global macro funds and funds of funds. Specifically, Global macro hedge fund manager focus to generate positive returns based on currency futures and options. He/she focused on fixed – income securities derivatives products or stock indices futures and options. They are trying to eliminate the market risk by examining carefully the macroeconomic indicators and the political trends. They are checking the appreciation or depreciation of currencies by using options and futures. They use spot and forward rates futures and options by checking the interest rates. They check the monetary policy of each country in relation to the macroeconomic indicators, related to employment, gross domestic product, inflation and production. In addition, they check changes in interest rates resulted from short and long – term US treasury fixed income products. On the other hand, funds of hedge funds invest solely in other hedge funds. The hedge fund manager selects funds based on a specific investment strategy or a combination of different investment strategies to achieve a better return. The benefit of combining different investment strategies is to achieve diversification and skilful management to reduce market risk. The disadvantages are the fees of asset management and the incentive fees that are charged to manage these funds. They charge a 2% fee and an incentive fee of 15% to 25 % from the profit that is generated. The double fee structure is a disadvantage of investing in funds of funds. The sample is provided from Data Feeder dataset. It includes hedge funds for the period 1990 to 2003. We find strong negative linear correlation between funds of funds and global macro hedge funds. The covariance matrix is positive and there is large dispersion in average returns by using risk- adjusted measures.