Every year, pure random chance dictates that exactly half of all investors will outperform the median and half underperform the median.  The Holy Grail of alpha generation, of course, is to outperform more than pure random chance should allow.  In other words, to produce persistent alpha.

In our monthly column featuring the thoughts of a member of the Chartered Alternative Investment Analyst (CAIA) Association, we feature one academic who may have identified a way to uncover such non-random outperformance.  Daniel Capocci, Ph.D., CAIA, is a senior portfolio manager at KBL European Private Bankers, a lecturer at the Luxembourg School of Finance and a Research Associate at the Edhec Risk & Asset Management Center.

Alternative Viewpoints, powered by CAIA

Special to AllAboutAlpha.com by: Dr. Daniel Capocci, CAIA, KBL European Private Bankers

Three fields exist that examine hedge fund performance. The first includes studies that compare the performance of hedge funds with equity and other indices (some authors conclude that hedge funds are able to outperform these indices, whereas others are more cautious in their conclusions).

The second field of hedge fund performance analysis compares the performance of hedge funds with that of mutual funds (where some have found that hedge funds constantly obtain superior performance to mutual funds, although lower and more volatile returns than the reference market indices considered.)

Finally, the third group of hedge fund performance analysis examines the persistence of hedge fund returns.  Persistence is particularly important in the case of hedge funds because the hedge fund industry has a higher attrition rate than mutual funds.

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