The Performance of Hedge Funds: Risk, Return, and Incentives

Authors: Ackermann, Carl1; McEnally, Richard2; Ravenscraft, David2

Source: The Journal of Finance, Volume 54, Number 3, June 1999 , pp. 833-874(42)

Publisher: Blackwell Publishing

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Abstract:

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988-1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data-conditioning biases is explored. We find evidence that positive and negative survival-related biases offset each other.

Document Type: Research article

DOI: 10.1111/0022-1082.00129

Affiliations: 1: College of Business Administration, University of Notre Dame, 2: Kenan-Flagler Business School, University of North Carolina, Chapel Hill

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