Should Hedge Funds Deviate from the Benchmark?

41 Pages Posted: 30 Oct 2017 Last revised: 10 Mar 2019

Date Written: March 4, 2019


We examine the relationship between deviating from the benchmark and subsequent performance for hedge funds. We propose a simple new measure of benchmark deviations, termed the Dispersion Contribution Index (DCI), which is based on a fund's return-distance from the mean return of same-style funds. We find that funds which deviate the most from their benchmark tend to underperform relative to their less distinctive peers, after accounting for their idiosyncratic characteristics. This relative underperformance stems primarily from the higher risk exposure associated with pursuing a unique strategy. Our findings are robust to a wide array of additional tests.

Keywords: Hedge funds; performance; benchmark deviations; managerial skill

JEL Classification: G10, G11, G23

Suggested Citation

Panopoulou, Ekaterini and Voukelatos, Nikolaos, Should Hedge Funds Deviate from the Benchmark? (March 4, 2019). Available at SSRN: or

Ekaterini Panopoulou

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Nikolaos Voukelatos (Contact Author)

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom
0044 (0) 1227827705 (Phone)

HOME PAGE: http://

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics