The Alpha and Omega of Hedge Fund Performance Measurement

Noël Amenc, Lionel Martellini: The fact that hedge funds are starting to gain wide acceptance while they still remain a somewhat mysterious asset class enhances the need for a better measurement of their performance.

Author(s):

Noel Amenc

Professor of Finance, EDHEC Graduate School of BusinessHead of Research, Misys Asset Management Systems

Lionel Martellini

Assistant Professor of Finance, Marshall School of Business

This paper is an attempt to provide a unified picture of hedge fund managers' ability to generate abnormal returns. To alleviate the concern over model risk, we consider an extensive set of models for assessing the risk-adjusted performance of hedge fund managers. We conclude that hedge funds appear to have significantly positive alphas when normal returns are measured by an explicit factor model, even when multiple factors serving as proxies for credit or liquidity risks are accounted for. However, hedge funds on average do not have significantly positive alphas once the entire distribution is considered or implicit factors are included. While we find significantly positive alphas for a subset of hedge funds across all possible models, our main contribution is perhaps to show that (i) different models strongly disagree on the absolute riskadjusted performance of hedge funds as evidenced by a very large dispersion of alphas across models and yet (ii) they largely agree on hedge funds'relative performance in the sense that they tend to rank order the funds in the same way.

Type: Working paper
Date: le 01/02/2003
Research Cluster : Finance

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