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Alpha or beta in the eye of the beholder: What drives hedge fund flows?

Author

Listed:
  • Agarwal, Vikas
  • Green, Tracy Clifton
  • Ren, Honglin
Abstract
CAPM alpha explains hedge fund flows better than alphas from more sophisticated models. This suggests that investors pool together sophisticated model alpha with returns from exposures to traditional (except for the market) and exotic risks. We decompose performance into traditional and exotic risk components and find that while investors chase both components, they place greater relative emphasis on returns associated with exotic risk exposures that can only be obtained through hedge funds. However, we find little evidence of persistence in performance from traditional or exotic risks, which cautions against investors' practice of seeking out risk exposures following periods of recent success.

Suggested Citation

  • Agarwal, Vikas & Green, Tracy Clifton & Ren, Honglin, 2017. "Alpha or beta in the eye of the beholder: What drives hedge fund flows?," CFR Working Papers 15-08, University of Cologne, Centre for Financial Research (CFR), revised 2017.
    • Handle: RePEc:zbw:cfrwps:1508
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    References listed on IDEAS

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    More about this item

    Keywords

    Hedge Funds; Investor Flows; Alpha; Alternative Beta; Exotic Beta;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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