A Note on the Dynamics of Hedge-Fund-Alpha Determinants

  • Olga Kolokolova


Various studies have analyzed the determinants of hedge fund performance. The majority of them, however, come to contradictory conclusions with respect to the direction of influence of different factors on fund performance. The key reason for the inconsistencies is the highly dynamic nature of hedge funds. This paper specifically focuses on the dynamics of the relations between hedge fund performance and various microeconomic factors. It quantifies shifts in the average fund alpha that result from changes in hedge fund style, age, size, and fee structure and investigates the time variation of these shifts. The empirical results highlight the dynamic nature of the hedge fund industry. Hedge funds seem to generate a positive and significant alpha on average; however, the alpha level varies considerably over time. It is hard to predict the exact absolute alpha level based on the hedge fund micro-factors, but it seems to be possible to rank hedge funds using the micro-information. The results suggest that large funds with high relative inflow, charging higher than median management fees, are likely to deliver a higher alpha than their peers most of the time.


Hedge Fund High Alpha Absolute Flow Fund Flow Average Alpha 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Ackermann, C., McEnally, R., & Ravenscraft, D. (1999). The Performance of Hedge Funds: Risk, Return, and Incentives. Journal of Finance, 54(3), 833–874.CrossRefGoogle Scholar
  2. Agarwal, V., Daniel, N. D., & Naik, N. Y. (2004). Flows, Performance, and Managerial Incentives in Hedge Funds. Working paper. Georgia State University.Google Scholar
  3. Agarwal, V., Daniel, N. D., & Naik, N. Y. (2009). Role of Managerial Incentives and Discretion in Hedge Fund Performance. Journal of Finance, 64(5), 2221– 2256CrossRefGoogle Scholar
  4. Agarwal, V., & Naik, N. Y. (2000). On Taking the ‘Alternative’ Route: Risks, Rewards, Style and Performance Persistence of Hedge Funds. Journal of Alternative Investments, 2(3), 6–23.CrossRefGoogle Scholar
  5. Agarwal, V., & Naik, N. Y. (2000). Generalized Style Analysis of Hedge Funds. Journal of Asset Management, 1(1), 93–109.CrossRefGoogle Scholar
  6. Agarwal, V., & Naik, N. Y. (2000). Performance Evaluation of Hedge Funds with Option- Based and Buy-and-Hold Strategies. Working paper: Georgia State University.Google Scholar
  7. Amenc, N., Curtis, S., & Martellini, L. (2003). The Alpha and Omega of Hedge Fund Performance Measurement. Working paper. EDHEC Risk and Asset Management Research Centre.Google Scholar
  8. Brorsen, B. W., & Harri, A. (2004). Performance Persistence and the Source of Returns for Hedge Funds. Applied Financial Economics, 14(3), 131–141.Google Scholar
  9. Brown, S. J., & Goetzmann, W. N. (2003). Hedge Funds with Style. Journal of Portfolio Management, 29(2), 101–112.CrossRefGoogle Scholar
  10. Brown, S. J., Goetzmann, W. N., & Liang, B. (2004). Fees on Fees in Funds of Funds. Yale ICF Working paper 02–33.Google Scholar
  11. Brown, S. J., Goetzmann, W. N., & Park, J. (2001). Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry. Journal of Finance, 56(5), 1869–1886.CrossRefGoogle Scholar
  12. De Souza, C., & Gokcan, S. (2003). How Some Hedge Fund Characteristics Impact Performance. AIMA Journal.Google Scholar
  13. Favre, L., Sr., & Ranaldo, A. (2005). How to Price Hedge Funds: From Two- to Four- Moment CAPM. Working paper. EDHEC Risk and Asset Management Research Center.Google Scholar
  14. Fung, W., & Hsieh, D. A. (1997). Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds. The Review of Financial Studies, 10(2), 275–302.CrossRefGoogle Scholar
  15. Fung, W., & Hsieh, D. A. (2000). Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases. Journal of Financial and Quantitative Analysis, 35(3), 291–307.CrossRefGoogle Scholar
  16. Fung, W., & Hsieh, D. A. (2001). The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers. Review of Financial Studies, 14(2), 313–341.CrossRefGoogle Scholar
  17. Fung, W., & Hsieh, D. A. (2004). Hedge Fund Benchmarks: A Risk-Based Approach. Financial Analysts Journal, 60(5), 65–80.CrossRefGoogle Scholar
  18. Fung, W., Hsieh, D. A., Naik, N. Y., & Ramadorai, T. (2008). Hedge Funds: Performance, Risk and Capital Formation. Journal of Finance, 63(4), 1777–1803.CrossRefGoogle Scholar
  19. Getmansky, M. (2005). The Life Cycle of Hedge Funds: Fund Flows, Size and Performance. Working paper: MIT Sloan School of Management.Google Scholar
  20. Getmansky, M., Lo, A. W., & Makarov, I. (2004). An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns. Journal of Financial Economics, 74(3), 529–610.CrossRefGoogle Scholar
  21. Goetzmann, W. N., Ingersoll, J. E., Jr., & Ross, S. A. (2003). High-Water Marks and Hedge Fund Management Contracts. Journal of Finance, 58(4), 1685–1717.CrossRefGoogle Scholar
  22. Gregoriou, G. N., & Rouah, F. (2003). Large versus small hedge funds: does size affect performance? Journal of Alternative Investment, 5(5), 75–77.Google Scholar
  23. Howell, M. J. (2001). Fund Age and Performance. Journal of Alternative Investments, (Fall 2001).Google Scholar
  24. Ibbotson, R. G., & Chen, P. (2005). Sources of Hedge Fund Returns: Alphas, Betas, and Costs. Yale ICF Working Paper No. 05–17.Google Scholar
  25. Ibbotson, R. G., & Chen, P. (2006). The A, B,Cs of Hedge Funds: Alphas, Betas, and Costs. Yale ICF Working Paper No. 06–10.Google Scholar
  26. Kazemi, H. B., Schneeweiss, T., & Martin, G. (2002). Understanding Hedge Fund Performance: Research Issues Revisited-Part I. Journal of Alternative Investments, 5(3), 6–22.CrossRefGoogle Scholar
  27. Koh, F., Koh, W. T., & Teo, M. (2003). Asian Hedge Funds: Return Persistence, Style, and Fund Characteristics. Working paper: Singapore Management University.Google Scholar
  28. Kosowski, R., Naik, N. Y., & Teo, M. (2007). Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis. Journal of Financial Economics, 84(1), 229–264.CrossRefGoogle Scholar
  29. Kouwenberg, R., & Ziemba, W. T. (2007). Incentives and risk taking in hedge funds. Journal of Banking and Finance, 31(11), 3291–3310.CrossRefGoogle Scholar
  30. Liang, B. (1999). On the Performance of Hedge Funds. Financial Analysts Journal, 55(4), 72–85.CrossRefGoogle Scholar
  31. Liang, B. (2000). Hedge Funds: The Living and the Dead. Journal of Financial and Quantitative Analysis, 35(3), 309–326.CrossRefGoogle Scholar
  32. Naik, N. Y., Ramadorai, T., & Strömqvist, M. (2007). Capacity Constraints and Hedge Fund Strategy Returns. European Financial Management, 13(2), 239–256.CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Manchester Business SchoolManchesterUK

Personalised recommendations