51 Pages Posted: 21 May 2014 Last revised: 30 Mar 2018
Date Written: March 26, 2018
We suggest a new measure to evaluate hedge funds - relative alpha. It links each hedge fund to a group of its peers in a straightforward, semi-parametric way. We allow for omitted factors, yet do not require knowledge of the true factor structure nor do we need to estimate any factor model. We show that relative alpha outperforms traditional, absolute alpha (e.g., based on Fung and Hsieh (2001)). Relative alpha has higher explanatory power in-sample, predicts the out-of-sample performance of hedge funds, and is more persistent. We also apply relative alpha successfully to mutual funds.
Keywords: hedge funds, performance alpha
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation