Whither alpha? Hedge fund performance in voluntary versus regulatory data sets

Recent years have witnessed growing pessimism from investment practitioners and academics regarding hedge funds’ ability to produce abnormal returns, or “alpha”. Since the 2008–09 global financial crisis, hedge fund managers have been unable to produce abnormal returns in aggregate. However, such estimates mainly rely on returns that are voluntarily disclosed by fund managers. The main question of this thesis is how the voluntarily reporting funds differ from the funds that prefer to stay hidden.

We combine the voluntary data with a novel data set based on hedge funds’ confidential Form PF reports, and thus gain access to the hiding funds. We find that around half of hedge fund assets are managed by the hiding funds. In addition, the hiding funds have much greater performance compared to non-hiding funds and can still deliver positive alpha post-crisis.

The main finding of thethesis is that the hedge fund industry is still thriving, but the best funds do not report voluntarily to commercial data vendors. Some investors are still making their investment decisions based on the voluntary data, which according to our results is ill-informed—at least until the data vendors step up their game and gain access to the currently non-listed, superior funds.