The volatility factor and the alpha of hedge funds and mutual funds in South Africa

Sanyangare, Onaindini
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Performance measures based on CAPM, such as Jensen's (1968) alpha, with alpha measuring the value addition or outperformance by portfolio fund managers relative to the market or comparable benchmarks, have been used to measure or assess portfolio manager skill or performance. Assessing fund manager performance is crucial to the investment process, and it assists with decision making (Andrew, 2014). Research is limited when looking at the South African context and considering the performance of both fund management sectors while incorporating the low volatility-anomaly. This study sought to determine if volatility is priced in the South African hedge funds and mutual funds. This was achieved through the application of multifactor asset pricing models and Jensen’s Alpha. Some perivious stduies have identified this anomaly and found that portfolios with low volatility of returns outperformed their significant-high volatility counterparts. This study uses the Carhart (1997) model and the Fung and Heish (2001) models augmented for volatility to determine if volatility is indeed priced in South Africa’s mutual fudns and hedge funds. First, the hedge fund and unit trust returns were modelled without the volatility factor, and secondly, the returns were modelled factoring in the volatility factor. This was done to demystify the impact of the inclusion of the volatility factor, particularly to the alphas, and to separately capture the impact of the volatility factor on the overall returns of the unit trusts and hedge funds in South Africa. Although insignificant in most of the models, the inclusion of the volatility factor did improve the explanatory power of the models.
A research submitted in fulfilment of the requirements for the degree of Masters of Management in Finance and Investment (MMFI) to the Faculty of Commerce, Law and Management, Wits Business School, University of the Witwatersrand, Johannesburg, 2020
Volatility Factor, Alpha, Hedge Funds, Mutual funds, South Africa