This study examines the performance of hedge funds and their capacity to earn alpha or risk-adjusted excess returns for investors. In this study, the authors examine a long sample of hedge fund returns from 1994-2006 and they consider whether a more simple multi-factor model can explain hedge fund returns without the inclusion of complex option based investment strategies. This study proposes an eight-factor model and reveals that as few as 5%-7% of 7,355 hedge funds over the 1994-2006 sample period earned statistically significant alpha. The introduction of this eight-factor model along with Capocci and Hubner (2004), Fung and Hsieh (2004) provides investors with the necessary tools to evaluate hedge fund performance. However, the findings from these studies suggest that hedge fund alpha is as elusive as ever -- the search for true skill continues.
The search for hedge fund alpha while hedge funds continue to increase their funds under management, the evidence of their ability to earn alpha or excess returns remains mixed. our study considers whether hedge fund returns can be explained by a simple multi-factor model without the inclusion of complex option based investment strategies. we found that over the 1994–2006 period, only 5–7% of the hedge funds we studied earned statistically significant alpha, suggesting that hedge fund alpha is as elusive as ever.
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