hedge strongfundsstrong risk and return by burton g. malkiel, princeton.pdf

Hedge Funds: Risk and Return by Burton G. Malkiel, Princeton University Atanu Saha, Analysis Group CEPS Working Paper No. 104 October 2004 The authors are enormously indebted to Chia Hsun Chang, Derek Jun, Jonathan Blumenstein, and Alison Jonas for invaluable research assistance. We also want to acknowledge the help of Emil Czechowski, Kevin Laughlin, Frank Vannerson, and Basak Yeltekin. This work was supported by Princeton’s Center for Economic Policy Research. Please note: the content of this paper is under review. Some content is still being refined. This paper is intended to be used for discussion purposes only. Preliminary Draft: Not for quotation or citation. Hedge Funds: Risk and Return Burton G. Malkiel Atanu Saha Abstract Constructing a data base that is relatively free of bias, this paper provides measures of the returns of hedge fund s as well as the distinctly non-normal characteristics of the data. We provide risk-adjusted measures of performance as well as tests of the degree to which hedge funds live up to their claim of market neutrality. We also examine the substantial attrition of hedge funds and analyze the determinants of hedge fund survival as well as perform tests of return persistence. Finally, we examine the claims of the managers of “fund s of funds” that they can form portfolios of “the best” hedge funds and that such funds provide useful instruments for individual investors. We conclude that hedge funds are far riskier and provide much lower returns than is commonly