Economic and Financial Reports Volume 02/2006

Does the hedge fund industry deliver alpha?

We measure the total-risk-adjusted (as opposed to factor-risk-adjusted) performances of hedge fund indices in well-diversified portfolios. Alpha is defined as the difference between, on the one hand,  the average return  on a mean-variance  efficient portfolio  containing exclusively  traditional market assets  (such as stocks and bonds)  and, on the other hand,  the average return  on a mean-variance efficient portfolio containing traditional market assets and the new asset ( such as a hedge fund index), where both portfolios carry the same risk. Alpha is conditioned on this risk level.