Citation

Discussion Paper Details

Please find the details for DP5565 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Hedge Funds: Performance, Risk and Capital Formation

Author(s): William Fung, David A Hsieh, Narayan Naik and Tarun Ramadorai

Publication Date: March 2006

Keyword(s): alpha, factor models, flow, funds-of-hedge funds, hedge funds and performance

Programme Area(s): Financial Economics

Abstract: We use a comprehensive dataset of Funds-of-Hedge-Funds (FoFs) to investigate performance, risk and capital formation in the hedge fund industry over the past ten years. We confirm the finding of high systematic risk exposures in FoF returns. We divide up the past ten years into three distinct subperiods and demonstrate that the average FoF has only delivered alpha in the short second period from October 1998 to March 2000. In the cross section of FoFs, however, we are able to identify FoFs capable of delivering persistent alpha. We find that these more successful hedge funds experience far greater (and steadier) capital inflows than their less fortunate counterparts. Berk and Green's (2004) rational model of active portfolio management implies that diminishing returns to scale combined with the inflow of new capital leads to the erosion of superior performance over time. In keeping with this implication, we provide evidence that even successful hedge funds have experienced a recent, dramatic decline in risk-adjusted performance.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5565

Bibliographic Reference

Fung, W, Hsieh, D, Naik, N and Ramadorai, T. 2006. 'Hedge Funds: Performance, Risk and Capital Formation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5565