Do hedge funds generate alpha?
Do hedge funds, in aggregate, generate positive alpha? If they do, that’s quite impressive, seeing as how mutual funds, in aggregate, generate significantly negative alpha. Of course, the question is hard to answer, for two main reasons: Firstly, measuring alpha is very hard, and secondly, getting data out of hedge funds is even harder. Looking at indices certainly doesn’t help, since they don’t measure alpha and they suffer from dreadfull survivorship bias. Still, René Stultz has taken a stab at summarizing the research on this subject: Ibbotson and Chen (2005) examine the performance of hedge funds from January 1999 to March 2004. Their study uses 3,538 funds. After adjusting for various sample biases, they conclude that… the average alpha of the funds is 3.7 percent. With this estimate, the alpha of hedge funds is particularly impressive when compared with the alpha of equity mutual funds. Malkiel (1995) estimates the alpha of all equity mutual funds at -3.20 percent… A study by
