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The Performance of Hedge Funds: Risk, Return, and Incentives

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  • Carl Ackermann
  • Richard McEnally
  • David Ravenscraft

Abstract

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988–1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data‐conditioning biases is explored. We find evidence that positive and negative survival‐related biases offset each other.

Suggested Citation

  • Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, June.
    • Handle: RePEc:bla:jfinan:v:54:y:1999:i:3:p:833-874
    DOI: 10.1111/0022-1082.00129
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