On Taking the “Alternative” Route: The Risks, Rewards, and Performance Persistence of Hedge Funds

Abstract

The risk–return characteristics, risk exposures, and performance persistence of various hedge fund strategies remains an area of interest to alternative asset investors. Using a database on hedge fund indices and individual hedge fund managers in a mean–variance framework, results show that a combination of alternative investments and passive indexing provides a significantly better risk–return tradeoff than passively investing in the different asset classes. Moreover, using parametric and non–parametric methods, a reasonable degree of persistence is found for hedge fund managers. This seems to be attributable more to the losers continuing to be losers instead of winners continuing to be winners and highlights the importance of manager selection in case of hedge funds.