Article | Journal of Financial Economics | May 2011

Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn

by Ilia Dichev and Gwen Yu


The returns of hedge fund investors depend not only on the returns of the hedge funds they hold but also on the timing and magnitude of their capital flows in and out of the funds. We use dollar-weighted returns (a form of IRR) to assess the properties of actual investor returns on hedge funds and compare them to buy-and-hold fund returns. Our main finding is that annualized dollar-weighted returns are on the magnitude of 3% to 7% lower than corresponding buy-and-hold fund returns. Using factor models of risk and the estimated dollar-weighted performance gap, we find that the real alpha of hedge fund investors is close to zero. In absolute terms, dollar-weighted returns are reliably lower than the return on the S&P 500 index and are only marginally higher than the risk-free rate as of the end of 2008. The combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought.

Keywords: Investment Funds; Investment Return; Capital Markets; Market Timing; Currency;


Dichev, Ilia, and Gwen Yu. "Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn." Journal of Financial Economics 100, no. 2 (May 2011): 248–263.