Autori
Beltratti, Andrea
Morana, Claudio

Titolo
Do hedge funds make markets more efficient?
Periodico
Università degli Studi del Piemonte Orientale 'A. Avogadro' : Facoltà di Economia - Dipartimento di Scienze Economiche e Metodi Quantitativi "SEMEQ" - Quaderni
Anno: 2005 - Volume: 05 - Fascicolo: 111 - Pagina iniziale: 1 - Pagina finale: 37

The growth in the size of the hedge funds industry has led some investors to worry about a decline in alpha, associated with the excess of smart hedge fund managers chasing too few arbitrage opportunities in international financial markets. Preoccupations with the excessive number of hedge funds are certainly reinforced by some short run and medium run signals obtained from the point of view of returns. Yet, short run disappointment in hedge fund returns may also be due to changing market conditions, as the decreased volatility in equity markets and lack of momentum in currency markets. In the paper we introduce a multivariate components model for returns and net inflows into hedge funds, which allows to account for time-varying market premia and to estimate arbitrage opportunities as an unobserved component variable of the econometric model. Using several categories of hedge funds we then assess whether hedge funds do produce extra profits and whether the flows of funds into the industry are dynamically related to returns. Our results do point to a positive correlation between past returns and future flows, while the evidence concerning the linkage between past flows and future returns is mixed. However, we do not find any structural decline in alpha for most hedge fund categories. Key words: Hedge funds, performance, asset pricing models, unobserved components models




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