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Hedge Funds: Performance, Risk, and Capital Formation






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    • Fung and Naik are at London Business School, Hsieh is at Duke University, and Ramadorai is at Said Business School at the University of Oxford, the Oxford-Man Institute for Quantitative Finance, and CEPR. We thank Omer Suleman and especially Aasmund Heen for excellent research assistance. We also thank an anonymous referee, Robert Stambaugh (the editor), John Campbell, Mila Getmansky, Harry Markowitz, Ludovic Phalippou, Tuomo Vuolteenaho, and seminar participants at the London School of Economics, University of Oxford, Stockholm Institute for Financial Research, Warwick University, the IXIS-NYU hedge fund conference, University of Massachusetts at Amherst, the 2006 Western Finance Association annual meetings, the 2006 INQUIRE-UK conference, the 2006 Northwestern Conference on Hedge Funds, and the 2007 American Finance Association annual meetings for comments. We gratefully acknowledge support from the BSI Gamma Foundation and from the BNP Paribas Hedge Fund Centre at the London Business School.


We use a comprehensive data set of funds-of-funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund-of-funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds-of-funds consistently delivers alpha. The alpha-producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future.