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Higher risk, lower returns: What hedge fund investors really earn

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  • Dichev, Ilia D.
  • Yu, Gwen

Abstract

The returns of hedge fund investors depend not only on the returns of the funds they hold but also on the timing and magnitude of their capital flows in and out of these funds. We use dollar-weighted returns (a form of Internal Rate of Return (IRR)) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the Standard & Poor's (S&P) 500 index, and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.

Suggested Citation

  • Dichev, Ilia D. & Yu, Gwen, 2011. "Higher risk, lower returns: What hedge fund investors really earn," Journal of Financial Economics, Elsevier, vol. 100(2), pages 248-263, May.
  • Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:248-263
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    References listed on IDEAS

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    Cited by:

    1. Jędrzej Białkowski & Huong Dieu Dang & Xiaopeng Wei, 2017. "Does the Tail Wag the Dog? Evidence from Fund Flow to VIX ETFs and ETNs," Working Papers in Economics 17/17, University of Canterbury, Department of Economics and Finance.
    2. Antonio Di Cesare & Philip A. Stork & Casper G. de Vries, 2015. "Risk Measures for Autocorrelated Hedge Fund Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 13(4), pages 868-895.
    3. Guillermo Baquero & Marno Verbeek, 2015. "Hedge fund flows and performance streaks: How investors weigh information," ESMT Research Working Papers ESMT-15-01, ESMT European School of Management and Technology.
    4. Bradley Jones, 2015. "Asset Bubbles; Re-thinking Policy for the Age of Asset Management," IMF Working Papers 15/27, International Monetary Fund.
    5. Szabolcs Szikszai & Tamas Badics, 2014. "Enhanced Funds Seeking Higher Returns," Working papers wpaper43, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    6. Muñoz, Fernando, 2016. "Cash flow timing skills of socially responsible mutual fund investors," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 110-124.
    7. Dvorak Tomas, 2012. "Timing of Retirement Plan Contributions and Investment Returns: The Case of Defined Benefit versus Defined Contribution," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-26, May.
    8. Bradley Jones, 2016. "Institutionalizing Countercyclical Investment; A Framework for Long-term Asset Owners," IMF Working Papers 16/38, International Monetary Fund.

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