Abstract

http://ssrn.com/abstract=1300779
 
 

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Hedge Fund Due Diligence: A Source of Alpha in a Hedge Fund Portfolio Strategy


Stephen J. Brown


New York University - Stern School of Business

Thomas L. Fraser


Attorney in New York City

Bing Liang


University of Massachusetts Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)

January 2008

NYU Working Paper No. FIN-07-032

Abstract:     
Due diligence is an important source of alpha in a well designed hedge fund portfoliostrategy. It is generally understood that the high returns possible in investing in hedgefunds are somewhat offset by the relative lack of transparency on operational issues. Theperformance of a diversified hedge fund portfolio can be enhanced by excluding thosefunds likely to do poorly or fail due to operational risk concerns. However, effectivedue diligence is an expensive concern. This implies that there is a strong competitiveadvantage 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.

Number of Pages in PDF File: 21

Keywords: Hedge funds, operational risk, due diligence, alpha

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Date posted: November 13, 2008  

Suggested Citation

Brown, Stephen J. and Fraser, Thomas L. and Liang, Bing, Hedge Fund Due Diligence: A Source of Alpha in a Hedge Fund Portfolio Strategy (January 2008). NYU Working Paper No. FIN-07-032. Available at SSRN: http://ssrn.com/abstract=1300779

Contact Information

Stephen J. Brown
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)
Thomas L. Fraser
Attorney in New York City ( email )
2250 Broadway
New York, NY 10024
United States
212 799 0799 (Phone)
Bing Liang
University of Massachusetts Amherst - Department of Finance & Operations Management ( email )
Amherst, MA 01003
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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