Hedge funds: performance, risk and capital formation

Finance

BNP Paribas Hedge Fund Centre Working Paper Series

Fung W; Naik N Y; et al.

Narayan Naik

2007

We use a comprehensive dataset of funds-of-funds to investigate performance, risk and capital formation in the hedge fund industry over the decade from 1995-2004. We divide the ten years into three sub-periods and demonstrate that the average fund-of-funds has only delivered alpha in the short sub-period between October 1998 and March 2000. In the cross-section, however, we identify funds-of-funds 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.

This paper is a revision of HF-018

Hedge Fund Centre

HF-025

BNP Paribas Hedge Fund Centre Working Paper Series

No