Performance of Technology Sector Hedge Funds in Emerging Markets

Abstract

We examine the performance of technology sector hedge funds with a special focus on emerging markets. We analyze risk-adjusted returns, alpha determinants, and various provisions of the hedge funds. We find that technology hedge funds show positive risk-adjusted returns on average and that the emerging market tech funds outperform the nonemerging market funds in general. Classified geographically, Eastern Europe funds exhibit the greatest performance and the highest ratio of funds with significant alpha. We also observe that the abnormal returns of emerging market funds are positively associated with their past performance, flow, and incentive fee, but negatively related with size.

KEY WORDS:

• emerging markets
• hedge funds
• performance
• technology sector

Notes

1. CB Insights, “Hedge funds and mutual funds increase investment pace to private tech companies” as of January 7, 2014. https://www.cbinsights.com/blog/hedge-mutualfund-tech-investments/ (accessed July 23, 2015).

2. The stock price of Facebook dramatically slumped to $20 per share from $38 of IPO price within two months of going public.

3. The dot-com bubble period is defined in various manners. We cover the tech bubble period as from January 1999 to December 2000. During the period, the Nasdaq Composite Index started around 2,000, peaked at 5,048 in March 2000, and went back to its initial level at the end.

4. The observations are winsorized at the 1 percent and 99 percent levels to remove outliers.

5. Geographic focuses relevant to emerging markets are as follows: Africa, Asia-Pacific excluding Japan, Eastern Europe, India, Latin America, Russia, global, and others.

6. According to this classification manner, the number of Latin America funds is only three. Therefore, all funds with only one geographical focus except the Asia-Pacific and the Eastern Europe are classified as others.

7. Three trend-following factors are extracted from Hsieh’s data library. http://faculty.fuqua.duke.edu/~dah7/HFRFData.htm.

8. By using an identical data set, Bae and Yi (2012) calculate 12.23 percent (9.92 percent) to be the average (median) yearly return of 3,756 samples in analysis of the relationship between performance persistence and flow restrictions of hedge funds.

9. We do not consider the time fixed effect during the dot-com bubble because the intercept is less likely to be affected by each time period within the dot-com bubble.

10. Berggrun et al. (2014) find performance persistence on equity funds in Brazil. Hence, it can be inferred that most technology hedge funds in Latin America are more likely to display bottom performance.

11. The coefficients for major risk factors such as equity market(+), bond market(−), and technology(+) also display similar patterns with those in Table 3.

12. Eling (2008) argues that the Sharpe ratio is the most widely used and best known performance measure in the investment industry.