The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think

Hedge Fund Performance: End of an Era?

“…Edelman et al (2013) hand collect data on the largest hedge fund firms and conclude that the censoring of non-reporting good and bad performers neutralizes any bias. In contrast, Barth et al (2021) find that non-reporting hedge funds, identified by studying filers of the new SEC Form PF, significantly outperform funds in the commercial databases.…”

“…2 Academic evidence is provided by Dichev and Yu (2011), who arrive at a similar conclusion when comparing hedge funds in aggregate to the S&P 500, Bali et al (2013), who find that only two of 11 hedge fund indices are superior to the S&P 500 using utility-based performance metrics, and Sullivan (2021), who reports that the alpha of a broad hedge fund index flipped from positive to negative in the decade following the 2008 financial crisis. Given the roughly $5 trillion (Barth et al (2021)) currently invested in hedge funds, the implications of the purported decline in their performance are critically important for the financial health of their investors including endowments and pension plans.…”

Hedge Fund Performance: A Quantitative Survey

“…Hedge funds are not allowed to publicly advertise and so having their performance record included in commercial databases may help them attract investors (Fung & Hsieh, 2004a;Baquero et al, 2005). This discretion was constrained by the Dodd-Frank Act of 2010 which mandates investment funds domiciled in the U.S. that manage more than $150 million in aggregate assets to register with the SEC and to provide basic periodic disclosures on asset values, returns, borrowings, strategy classifications, investor composition, and their largest counterparties (Barth et al, 2020). The asset value cutoff implies that the regulation applies only to the large hedge funds that may be systemically important.…”

“…Eugene F. Fama 1 Over the past three decades hedge funds have experienced a spectacular increase in popularity. The value of assets under management (AUM) increased about 100 times between 1990 and 2020 (Stulz, 2007;Barth et al, 2020). This trend is difficult to reconcile with the idea of efficient financial markets.…”

The Rationales of Hedge Fund Regulation

“…Even though regulators have been paying increased attention and have been constantly adjusting regulation concerning hedge funds since LTCM's failure in 1998, the total size of this industry is yet questionable. As Barth et al (2020) assess in their research paper "The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think," "the potential data gaps in hedge fund activities are not confined to questions of size; the extent to which hedge fund performance and investor flows have been comprehensively measured is similarly uncertain." 8 Of course, there are several reliable estimates regarding the size of hedge funds, but their ambiguity resides in the fact that, until recently, there were limited regulatory data collections on hedge fund activities.…”