In a more recent study, Duarte, Longstaff, and Yu (2005) created returns using various fixed-income arbitrage
trades frequently used by hedge funds--swap spreads, yield-curve spreads, mortgage spreads, fixed-income volatility arbitrage, and capital structure arbitrage.
Average serial correlations also vary considerably across categories in the combined database, but six categories stand out: convertible arbitrage (31.4 percent), fund of funds (19.6 percent), event driven (18.4 percent), emerging markets (16.5 percent), fixed-income arbitrage (16.2 percent), and multistrategy (14.7 percent).
They find that funds with the most significant amount of smoothing tend to be the more illiquid--for example, emerging market debt, fixed-income arbitrage, etc.--and after correcting for the effects of smoothed returns, some of the most successful types of funds tend to have considerably less attractive performance characteristics.
For example, in Figure 3 we plot the estimated probabilities of being in state 2, the high-volatility state, for the fixed-income arbitrage index for each month from January 1994 to August 2004.
One simply cannot look at the books of a convertible arbitrage, short or long/short portfolio, fixed-income arbitrage
, managed futures portfolio, or short-term event-driven strategy and tell its underlying governance structure.