Estimating Risk Premiums of Individual Hedge Funds

Abstract

This paper introduces a methodology for estimating the risk premiums earned by individual hedge funds and provides results of the distribution of risk premiums both within and between various hedge fund strategies. Results indicate that the majority of funds earn average excess return greater than the expected excess return based on the estimated total average risk premium. Although there is wide variation of the estimated risk premiums within each strategy, much of the variation is concentrated in the bottom and top-performing funds.

TOPICS: Factors, risk premia, analysis of individual factors/risk premia, factor-based models