Net Inflows and Time-Varying Alphas: The Case of Hedge Funds
Bocconi University - Department of Finance
Università di Milano Bicocca; International Centre for Economic Research (ICER); Center for Economic Research on Pensions and Welfare Policies (CeRP); Fondazione Eni Enrico Mattei (FEEM)
March 17, 2007
Quantitative and Qualitative Analysis in Social Sciences, Vol. 2, No. 3, pp. 67-94, 2008
We introduce a multivariate components model for returns and net relative inflows into hedge funds, accounting for time-varying market premia. We estimate alpha as an unobserved variable of the econometric model. We then assess whether several categories of hedge funds do produce alphas and whether the latter are related to capital inflows. Our results point to a positive correlation between past alphas and future flows and a negative relation between past flows and future alphas in the case of arbitrage-based styles. We do not find any structural decline in alpha for most hedge fund categories.
Keywords: Hedge funds, performance, asset pricing models, unobserved components models
JEL Classification: G2, G11, G15, C32Accepted Paper Series
Date posted: October 3, 2006 ; Last revised: May 11, 2010
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