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The Journal of Alternative Investments

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Primary Article

Do Hedge Fund Managers Display Skill?

Hung-Gay Fung, Xiaoqing Eleanor Xu and Jot Yau
The Journal of Alternative Investments Spring 2004, 6 (4) 22-31; DOI: https://doi.org/10.3905/jai.2004.391061
Hung-Gay Fung
The Dr. Y.S. Tsiang Chair Professor in the College of Business Administration of the University of Missouri-St. Louis in St. Louis, MO.
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  • For correspondence: fungh@msx.umsl.edu
Xiaoqing Eleanor Xu
An associate professor of finance in the W. Paul Stillman School of Business of Seton Hall University, South Orange, NJ.
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  • For correspondence: xuxe@shu.edu
Jot Yau
An associate professor of finance in the Albers School of Business and Economics of Seattle University, Seattle,WA.
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  • For correspondence: jyau@seattleu.edu
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Abstract

This study uses monthly data on 115 hedge funds for the seven-year period 1994–2000 to examine performance after accounting for target market indices and illiquidity effects. We find that the excess return on hedge funds is so small relative to the survivorship bias that it can be considered trivial, a finding suggesting no manager skill. Results also indicate that higher moments of returns do not appear to have a significant impact on the performance measure with excess returns. Incentive fees have significant positive effects on excess returns using the simple CAPM, but not on excess returns adjusted for illiquidity effects using the Dimson model. In addition, incentive fees appear to motivate hedge fund managers to reduce the systematic risk. Management fees, fund size, fund age, and leverage are important factors in explaining excess returns, but not in determining contemporaneous or lagged market betas.

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Vol. 6, Issue 4
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Do Hedge Fund Managers Display Skill?
Hung-Gay Fung, Xiaoqing Eleanor Xu, Jot Yau
The Journal of Alternative Investments Mar 2004, 6 (4) 22-31; DOI: 10.3905/jai.2004.391061

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Do Hedge Fund Managers Display Skill?
Hung-Gay Fung, Xiaoqing Eleanor Xu, Jot Yau
The Journal of Alternative Investments Mar 2004, 6 (4) 22-31; DOI: 10.3905/jai.2004.391061
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