The empirical literature on investment performance suggests that only hedge funds among institutional investors have delivered consistent superior performance. We examine whether this stylized fact holds when we narrow focus to long-equity holdings. In our sample period of 1997–2006, the long-equity holdings of hedge funds can generate a significant excess return (gross alpha) of 4.1 % per year, which contrasts with modest gross alphas of 0.3–1.8 % per year for other six classes of institutional investors. Given realistic execution and overhead costs, only hedge funds are likely to realize net excess returns from equity picking. Among small hedge funds, those with high churn rate show significant positive alphas but those with low churn rates don’t. Greatest superiority is associated with hedge funds with both high churn rate and high deviation from benchmark weights (high active share). Compared to other institutional investors, hedge funds load negatively on an illiquidity factor, which coheres with their higher churn since the latter would imply burdensome trading costs if executed with illiquid stocks. Hedge funds, uniquely among institutional investors, display superior timing of their loading on the market risk factor, and their superior stock-picking alpha persists across the three eras in our sample period.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Feb 26, 2014
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera