Emerging market hedge funds' performance after financial crisis : Focus in Eastern Europe and the effects of the economic sanctions

Abstract

The purpose of this thesis is to study the performance of emerging market hedge funds. Geographical focus is concentrated in Russia and Eastern Europe and the evaluation of performance is divided into several subperiods. Due to lack of previous research, the main focus is a time period starting in 2014. In March 2014 Russia invaded the Crimean area in Ukraine, and in the aftermath, western countries imposed financial sanctions against Russia. For example Russian stock markets have suffered from these restrictions and many sectoral sanctions have had negative effect on Russian economy. Thesis utilizes monthly returns of seven different geographically focused hedge fund indices between years 2000–10/2019. Explanatory variables capturing the exposures of hedge fund index returns consist of eight different risk factors including equity, credit, FX and trend-following option-like factors. Fung & Hsieh (2004) take an asset based style (ABS) approach to hedge funds and introduce seven risk factors to explain hedge fund returns. This model is modified to suit the purpose of this thesis and includes an eighth factor added in 2009 also by Fung & Hsieh. Traditional performance measures (Sharpe, Treynor, Sortino) are also covered in this thesis and calculated for each hedge fund index. Results suggest that the modified 8-factor ABS model is able to explain a great extent of most examined hedge fund index returns. The model works particularly with hedge funds with a direct exposure on Russia and/or Eastern Europe. The results also indicate that geographically focused hedge funds are on average highly dependent on local equity markets, which discloses a majority of their systematic risks inherent. Hedge funds' capability of generating statistically significant positive abnormal returns varies depending on the subperiod as well as hedge fund index. Only one hedge fund index in this thesis is able to generate significant positive alpha in every subperiod examined including the whole sample period.