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Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn

Ilia D. Dichev

Emory University - Department of Accounting

Gwen Yu

Harvard Business School

July 1, 2009

Journal of Financial Economics (JFE), Forthcoming

The returns of hedge fund investors depend not only on the returns of the funds they hold but also on the timing and magnitude of their capital flows in and out of these funds. We use dollar-weighted returns (a form of IRR) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3 to 7 percent lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the S&P 500 index, and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.

Number of Pages in PDF File: 43

Keywords: Hedge fund, Investor capital flows, Dollar-weighting

JEL Classification: G11, G23, G31

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Date posted: March 5, 2009 ; Last revised: August 29, 2010

Suggested Citation

Dichev, Ilia D. and Yu, Gwen, Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn (July 1, 2009). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1354070

Contact Information

Ilia D. Dichev (Contact Author)
Emory University - Department of Accounting ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
Gwen Yu
Harvard Business School ( email )
Soldiers Field Road
Morgan 383
Boston, MA 02163
United States
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