Journal of Financial Economics Vol. 154 2024
Is it alpha or beta? Decomposing hedge fund returns when models are misspecified
Abstract
We develop a novel approach to separate alpha and beta under model misspecification. It comes with formal tests to identify less misspecified models and sharpen the return decomposition of individual funds. Our hedge fund analysis reveals that: (i) prominent models are as misspecified as the CAPM, (ii) several factors (time-series momentum, variance, carry) capture alternative strategies and lower performance in all investment categories, (iii) fund heterogeneity in alpha and beta is large—an important result for fund selection and models of active management, (iv) performance is increasingly similar to mutual funds, (v) fund valuation is sensitive to investor sophistication.
- DOI
- 10.1016/j.jfineco.2024.103805
- Volume
- 154
- Pages
- 103805
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref