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Net Inflows and Time-Varying Alphas: The Case of Hedge Funds

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Author Info
Andrea Beltratti ()
Claudio Morana ()
Abstract

The 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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Publisher Info
Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 30-2006.

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Length: 32 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:icr:wpicer:30-2006

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Related research
Keywords: 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

References listed on IDEAS
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  3. Brandt, Michael W. & Kang, Qiang, 2004. "On the relationship between the conditional mean and volatility of stock returns: A latent VAR approach," Journal of Financial Economics, Elsevier, vol. 72(2), pages 217-257, May. [Downloadable!] (restricted)
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  5. Dybvig, Philip H., 1983. "An explicit bound on individual assets' deviations from APT pricing in a finite economy," Journal of Financial Economics, Elsevier, vol. 12(4), pages 483-496, December. [Downloadable!] (restricted)
  6. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
  7. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, 06. [Downloadable!] (restricted)
  8. Jagannathan, Ravi & Korajczyk, Robert A, 1986. "Assessing the Market Timing Performance of Managed Portfolios," Journal of Business, University of Chicago Press, vol. 59(2), pages 217-35, April. [Downloadable!] (restricted)
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