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Has Hedge Fund Alpha Disappeared?

Journal of Investment Management (JOIM), First Quarter 2011

34 Pages Posted: 8 Jan 2010 Last revised: 21 Dec 2016

Manuel Ammann

University of St. Gallen - School of Finance

Otto R. Huber

Credit Suisse

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Date Written: April 6, 2011

Abstract

This paper investigates the alpha generation of the hedge fund industry based on a recent sample compiled from the Lipper/TASS database covering the time period from January 1994 to September 2008. We find a positive average hedge fund alpha in the cross-section for the majority of strategies and a positive and significant alpha for roughly half of all funds. Moreover, the alpha of three-quarter of the strategy indices is positive and significant in the time series. A comparison of a factor model in which the risk factors are selected based on a stepwise regression approach and the widely used factor model proposed by Fung and Hsieh (2004) reveals that the estimated alpha is robust with respect to the choice of the factor model. In contrast to prior research, we find no evidence of a decreasing hedge fund alpha over time. Moreover, based on our sample, we cannot confirm prior evidence pointing to capacity constraints in the hedge fund industry.

Keywords: Hedge Funds, Performance, Alpha, Factor Models, Capacity Constraints

JEL Classification: G11, G12, G23

Suggested Citation

Ammann, Manuel and Huber, Otto R. and Schmid, Markus, Has Hedge Fund Alpha Disappeared? (April 6, 2011). Journal of Investment Management (JOIM), First Quarter 2011. Available at SSRN: https://ssrn.com/abstract=1532742 or http://dx.doi.org/10.2139/ssrn.1532742

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Otto R. Huber

Credit Suisse ( email )

Eleven Madison Avenue
9th Floor
New York, NY 10010
United States
2123253726 (Phone)

Markus Schmid (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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