Bridge over ocean
10 June 2021 Financial Analysts Journal Volume 77, Issue 3

Hedge Fund Performance: End of an Era?

  1. Nicolas P.B. Bollen
  2. Juha Joenväärä
  3. Mikko Kauppila

Hedge fund performance has weakened markedly since the financial crisis. No prediction model to select hedge funds could have overcome this trend, and the drivers of underperformance are still in place today.

This article documents a decline in aggregate hedge fund performance over the past decade. We tested whether a set of prediction models can select subsets of individual funds that buck the trend and subsequently outperform. Two of the predictors reliably picked funds that lowered the volatility and raised the Sharpe ratio of a multi-asset-class portfolio relative to a stock/bond portfolio over the full 1997–2016 sample. Hedge fund allocations reduced volatility in two subperiods but failed to improve the Sharpe ratio from 2008 onward. We explore potential explanations for the erosion of hedge fund performance.

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