The ABCs of Hedge Funds: Alphas, Betas, & Costs

26 Pages Posted: 1 Apr 2010 Last revised: 23 Apr 2010

See all articles by Roger G. Ibbotson

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Peng Chen

Ibbotson Associates

Kevin X. Zhu

Hong Kong Polytechnic University

Date Written: March 30, 2010

Abstract

Despite the retrenchment of the hedge fund industry in 2008, hedge fund assets under management are currently over one and a half trillion dollars. We analyze the potential biases in reported hedge fund returns, in particular survivor-ship bias and back fill bias. We then decompose the returns into three components: the systematic market exposure (beta), the value added by hedge funds (alpha), and the hedge fund fees (costs). We analyze the performance of a universe of about 8,400 hedge funds from the TASS database from January 1995 through December 2009. Our results indicate that both survivor-ship and back fill biases are potentially serious problems. Adjusting for these biases brings the net return from 14.26% to 7.63% for the equally weighted sample. Over the entire period, this return is slightly lower than the S&P 500 return of 8.04%, but includes a statistically significant positive alpha. We estimate a pre-fee return of 11.42%, which we split into a fee (3.78%), an alpha (3.01%), and a beta return (4.62%). The positive alpha is quite remarkable, since the mutual fund industry in aggregate does not produce alpha net of fees. The year by year results also show that alphas from hedge funds were positive during every year of the last decade, even through the recent financial crisis of 2008 and 2009.

Suggested Citation

Ibbotson, Roger G. and Chen, Peng and Zhu, Kevin X., The ABCs of Hedge Funds: Alphas, Betas, & Costs (March 30, 2010). Available at SSRN: https://ssrn.com/abstract=1581559 or http://dx.doi.org/10.2139/ssrn.1581559

Roger G. Ibbotson (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

2187 Atlantic Street
Stamford, CT 06902
United States
203 701 5900 (Phone)

Peng Chen

Ibbotson Associates ( email )

225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
(312) 616-1620 (Phone)
(312) 616-0404 (Fax)

Kevin X. Zhu

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
3,086
Abstract Views
13,187
rank
3,581
PlumX Metrics