80 Pages Posted: 13 Nov 2007 Last revised: 9 Jan 2008
Date Written: January 7, 2008
I group individual hedge funds on their ex ante betas into portfolios that have reliably different ex post betas. This approach constitutes an alternative to classifying funds by investment style and offers a way to accurately quantify individual funds' exposure to systematic risk. Hedge funds' characteristics predict returns in ways that are unrelated to risk exposures. Abnormal returns associated with characteristics are minimal. On average, betas (and characteristics) do not explain more than 20% (30%) of the cross-sectional variation in hedge fund returns. Under some assumptions about the data, hedge funds' abnormal returns justify their fees.
Keywords: Hedge funds
JEL Classification: G10, G19
Suggested Citation: Suggested Citation