HEDGE FUND ALPHA, PERFORMANCE PERSISTENCE AND RELATIONSHIP BETWEEN PERFORMANCE AND CAPITAL FLOWS

I use a comprehensive data set of hedge funds to investigate alpha, performance persistence andcapital formation in the hedge fund industry from 1989 to 2014. First part of this paper describeswhether hedge fund can generate significant positive alphas under different strategies such aslong/short, market neutral, fix income arbitrage, event driven etc. I find that at an over 20-yearhorizon, all the hedge fund strategies can produce positive significant alphas and the long/shortstrategy has the best performance with highest alpha. Then I test the performance persistence ofeach strategy with the rolling regression approach by setting the window size 36 month and findthat hedge fund performance persists at annual or even longer horizons. Moreover, I further try tofind the relationship between the capital flows and each fund’s performance, the result shows asignificant negative correlation, which means the capital inflows will attenuate the ability of thealpha producers to continue to deliver alpha in the future.