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Rodney Sullivan – Darden – Brown Bag Series
1 October 2019 @ 1:30 pm - 2:30 pm
Hedge Fund Alpha, Cycle or Sunset?
Rodney N. Sullivan, CFA, CAIA
The hedge fund industry has grown from $200 billion in assets under management at the turn of the millennium to now over $3 trillion. Many reports criticize hedge funds for destroying investor capital particularly since the 2008 global financial crisis (GFC). In this paper, I seek to demystify hedge fund strategies by evaluating fund performance that can be attributed to the market as well as other well-known systematic factors over the past 25 years to include outcomes prior to and following the 2008 GFC. When adjusted for market risk the evidence shows that, after fees and costs, hedge funds overall have shown a marked decline in risk-adjusted return and appraisal ratios since the GFC. Although performance has not been great in recent years, I show why it is perhaps not quite as terrible as many have suggested. I further investigate hedge fund returns against a suite of well-known systematic risk/return factors documented in the literature beyond the market factor and find that hedge funds have significant exposures to many of these factors which have importantly influenced their returns over the past 25 years.