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The Performance of Hedge Funds: Risk, Return, and Incentives

Author

Listed:
  • Carl Ackermann

    (College of Business Administration, University of Notre Dame,)

  • Richard McEnally

    (Kenan-Flagler Business School, University of North Carolina, Chapel Hill)

  • David Ravenscraft

    (Kenan-Flagler Business School, University of North Carolina, Chapel Hill)

Abstract

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988-1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data-conditioning biases is explored. We find evidence that positive and negative survival-related biases offset each other. Copyright The American Finance Association 1999.

Suggested Citation

  • 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, June.
  • Handle: RePEc:bla:jfinan:v:54:y:1999:i:3:p:833-874
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