The Search for Hedge Fund Alpha
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This paper analyses the performance of the global hedge fund industry to determine whether alpha, or risk-adjusted excess returns are earned. The efficient market hypothesis questions whether professional investors such as hedge funds can produce superior returns over and above a passive investment strategy. The study examines 7,355 surviving and non-surviving global hedge funds for the period 1994-2006. This paper proposes a simple multi-factor model which is easier to implement in comparison to more complex option-based frameworks that are proposed in the literature. The multi-factor framework employed in this study demonstrates that the returns of individual funds and the systematic return of the global hedge fund industry can be replicated with passive investment strategies in global financial markets. This study reveals little alpha or manager skill in this sample of hedge funds and therefore questions the validity of high management fee structures in this segment of the global funds management industry.
37th Australian Conference of Economists (ACE2008)
© 2008 Economic Society of Australia QLD Inc. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the publisher's website for access to the definitive, published version.