Hedge Fund Due Diligence: A Source of Alpha in a Hedge Fund Portfolio Strategy
21 Pages Posted: 30 Sep 2007 Last revised: 11 Sep 2009
There are 2 versions of this paper
Hedge Fund Due Diligence: A Source of Alpha in a Hedge Fund Portfolio Strategy
Hedge Fund Due Diligence: A Source of Alpha in a Hedge Fund Portfolio Strategy
Date Written: January 21, 2008
Abstract
Due diligence is an important source of alpha in a well designed hedge fund portfolio strategy. It is generally understood that the high returns possible in investing in hedge funds are somewhat offset by the relative lack of transparency on operational issues. The performance of a diversified hedge fund portfolio can be enhanced by excluding those funds likely to do poorly - or fail - due to operational risk concerns. However, effective due diligence is an expensive concern. This implies that there is a strong competitive advantage to those funds of funds sufficiently large to absorb this fixed and necessary cost. The consequent economies of scale that we document in funds of funds are quite substantial and support the proposition that due diligence is a source of alpha in hedge fund investment.
Keywords: Hedge funds, operational risk, due diligence, alpha
JEL Classification: G1, G2
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Characteristics of Risk and Return in Risk Arbitrage
By Mark L. Mitchell and Todd C. Pulvino
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By William N. Goetzmann, Roger G. Ibbotson, ...
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
Hedge Funds: The Living and the Dead
By Bing Liang
-
Flows, Performance, and Managerial Incentives in Hedge Funds
By Vikas Agarwal, Naveen D. Daniel, ...