Hedge funds: performance, risk and capital formation

Fung, W and Naik, N (2007) Hedge funds: performance, risk and capital formation. Working Paper. London Business School BNP Paribas Hedge Fund Centre Working Paper Series.

Abstract

We use a comprehensive dataset of fundsoffunds to investigate performance, risk and capital formation in the hedge fund industry over the decade from 19952004. We divide the ten years into three subperiods and demonstrate that the average fundoffunds has only delivered alpha in the short subperiod between October 1998 and March 2000. In the crosssection, however, we identify fundsoffunds capable of consistently delivering alpha. We find that these alpha producing funds are not as likely to liquidate as those that do not deliver alpha. The alpha producers also experience far greater and steadier capital inflows than their less fortunate counterparts. In turn, these capital inflows adversely affect the ability of the alpha producers to continue to deliver alpha in the future.