Is it alpha or beta? Decomposing hedge fund returns when models are misspecified

David Ardia, Laurent Barras, Patrick Gagliardini and Olivier Scaillet

Journal of Financial Economics, 2024, vol. 154, issue C

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.

Keywords: Hedge fund returns; Alpha; Beta; Model misspecification; Large cross-section (search for similar items in EconPapers)
JEL-codes: C55 C58 G11 G12 G23 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Is it Alpha or Beta? Decomposing Hedge Fund Returns When Models are Misspecified (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:154:y:2024:i:c:s0304405x2400028x

DOI: 10.1016/j.jfineco.2024.103805

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