SSRN-Sources of Hedge Fund Returns: Alphas, Betas, and Costs by Roger Ibbotson, Peng Chen

Great overview of the hedge fund industry.

SSRN-Sources of Hedge Fund Returns: Alphas, Betas, and Costs by Roger Ibbotson, Peng Chen: "Hedge funds have grown dramatically to roughly one trillion dollars currently. In this paper we focus on two issues. First, we analyze the potential biases in reported hedge fund returns, in particular survivorship bias and backfill bias. Second, we decompose the returns into three components: the systematic market exposure (beta), the value added by hedge funds (alpha), and the hedge fund fees (costs). We analyze the performance of a universe of about 3,500 hedge funds from the TASS database from January 1995 through March 2004. Our results indicate that both survivorship and backfill biases are potentially serious problems. The equally weighted performance of the funds that existed at the end of the sample period had a compound annual return of 16.64% net fees. Including dead funds reduced this return to 13.90%. Excluding backfill further reduced the return to 9.06%, net of fees. In this last sample, we estimate a pre-fee return of 12.8%, which we split into a fee (3.8%), an alpha (3.7%), and a beta return (5.4%). Overall, we find that the alphas are significantly positive and are approximately equal to the fees, meaning the excess returns were almost equally shared between hedge fund managers and their investors. "