Hedge Fund Alphas: Do They Reflect Managerial Skills or Mere Compensation for Liquidity Risk Bearing?

67 Pages Posted: 21 Nov 2008 Last revised: 24 Mar 2010

See all articles by Rajna Gibson

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI); European Corporate Governance Institute (ECGI)

Songtao Wang

Shanghai Jiao Tong University

Date Written: March 19, 2010

Abstract

This article analyzes the effect of liquidity risk on the performance of various hedge fund portfolio strategies. Similarly to Avramov et al. (2007), we find that, before accounting for the effect of liquidity risk, hedge fund portfolios that incorporate predictability in managerial skills generate superior performance. This outperformance disappears or weakens dramatically for six out of ten hedge fund style-based portfolios once we account for liquidity risk. Hence, for most hedge fund portfolios, “alphas” represent a compensation for liquidity risk bearing. These results are robust to an alternative performance evaluation model and to an alternative liquidity risk proxy.

Keywords: Hedge Funds, Liquidity Risk, Managerial Skills, Predictability

JEL Classification: G11, G12, G23

Suggested Citation

Gibson, Rajna and Wang, Songtao, Hedge Fund Alphas: Do They Reflect Managerial Skills or Mere Compensation for Liquidity Risk Bearing? (March 19, 2010). Swiss Finance Institute Research Paper No. 08-37, Available at SSRN: https://ssrn.com/abstract=1304541 or http://dx.doi.org/10.2139/ssrn.1304541

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41.22.379.89.83 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Songtao Wang (Contact Author)

Shanghai Jiao Tong University ( email )

1954 Huashan Road
Shanghai, Shanghai 200030
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,028
Abstract Views
7,780
Rank
45,857
PlumX Metrics