Returns to Active Management: The Case of Hedge Funds

30 Pages Posted: 6 Mar 2018 Last revised: 21 Apr 2018

See all articles by Maziar Kazemi

Maziar Kazemi

Massachusetts Institute of Technology (MIT)

Ergys Islamaj

World Bank

Date Written: November 8, 2016


Do more active hedge fund managing strategies generate higher returns than the less active ones? We develop a novel approach to measuring activeness for hedge funds by estimating the dynamics of risk exposure of a large sample of live and dead equity long-short funds. We find that higher activeness is positively correlated with raw excess returns, but not with risk-adjusted returns. Furthermore, the relationship between risk-adjusted returns and activeness is likely non-linear and some specifications suggest evidence of a negative association. The results suggest that a strategy that exposes hedge funds to more frequent changes in market risk exposures comes at the expense of higher risks that are not necessarily justified by better performance.

Keywords: Hedge Funds, Fama-French, Active Management, Dynamic Trading

JEL Classification: G11, G12, G14, G23

Suggested Citation

Kazemi, Maziar and Islamaj, Ergys, Returns to Active Management: The Case of Hedge Funds (November 8, 2016). Available at SSRN: or

Maziar Kazemi

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Ergys Islamaj (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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