Net Inflows and Time-Varying Alphas: The Case of Hedge Funds
AbstractThe growth in the size of the hedge funds industry has led some in-vestors to worry about a decline in alphas, associated with reduced arbitrage opportunities in international financial markets. We introduce a multivariate components model for returns and net relative inflows into hedge funds, accounting for time-varying market premia. We estimate alpha as an unobserved component variable of the econometric model. We then assess whether several categories of hedge funds do produce extra profits and whether the flows of funds into the industry are dynamically related to returns. Our results point to a positive correlation between past returns and future flows, while the evidence concerning the linkage between past flows and future returns is mixed. However, we do not find any structural decline in alpha for most hedge fund categories.
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Bibliographic InfoPaper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 30-2006.
Length: 32 pages
Date of creation: Jul 2006
Date of revision:
Hedge funds; performance; asset pricing models; unobserved components models;
Find related papers by JEL classification:
- G2 - Financial Economics - - Financial Institutions and Services
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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