Research suggests better way to measure true alpha performance of hedge fund return profiles

An accurate measure of alpha is difficult. Defining hedge fund risk exposures can be particularly tricky due to the large varieties of strategies and the specific nature of hedge fund return profiles.

A number of institutional investors now allocate a sizeable portion of their portfolios to hedge funds. This interest in hedge funds can be explained by the poor performance exhibited by traditional asset management.

For some years now, numerous studies have shown that the vast majority of active asset managers do not outperform ­passive ­investment.

Some authors find that the outperformance generated by active management just covers the costs generated by the strategy (Grossman and Stiglitz 1980