Hedge Funds: The Good, the Bad, and the Lucky
Journal of Financial and Quantitative Analysis, Volume 52, Issue 3, June 2017
While hedge funds have grown into a prominent investment vehicle over the last 20 years, many questions remain regarding their value to investors. A review of current literature from academics and practitioners alike indicates that there is no consensus as to whether an average hedge fund adds value after considering fees (typically 2% of assets and 20% of profits).
In a recent article titled “Hedge Funds: The Good, the Bad, and the Lucky,” published in the Journal of Financial and Quantitative Analysis, Analysis Group Vice President Michael Cliff and his coauthors developed a new performance measure to identify superior individual hedge funds, and demonstrated the practical application of the measure to a sample of 8,695 hedge funds. This method provides an estimate of the likelihood that a particular fund has enough skill to add value, recognizing that a fund's past performance reflects both skill and luck.