Equity Hedge Fund Performance, Cross-Sectional Return Dispersion, and Active Share

Smith, David M., “Equity Hedge Fund Performance, Cross-Sectional Return Dispersion, and Active Share,” 2014, Research in Finance, 30, 1-22.

33 Pages Posted: 12 Jan 2014 Last revised: 10 Apr 2014

See all articles by David M. Smith

David M. Smith

State University of New York at Albany - School of Business

Date Written: January 18, 2014

Abstract

This study examines several aspects of active portfolio management by equity hedge funds between 1996-2013. Consistent with the idea that cross-sectional return dispersion is a proxy for the market’s available alpha, our results show that equity hedge funds achieve their strongest performance during periods of elevated dispersion. The performance advantage is robust to numerous risk adjustments. Portfolio managers may use the current month’s dispersion to plan the extent to which the following month’s investment approach will be active or passive. We also estimate the active share for equity hedge funds and find an average of 53%. We further document the average annual expense ratio for managing hedge funds’ active share to be about 7%. This figure is remarkably close to active expense ratios reported previously for equity mutual funds, which may be interpreted as evidence of uniform pricing for active portfolio management services.

Keywords: Hedge funds, equities, portfolio choice

JEL Classification: G11, G12, G23

Suggested Citation

Smith, David McNeil, Equity Hedge Fund Performance, Cross-Sectional Return Dispersion, and Active Share (January 18, 2014). Smith, David M., “Equity Hedge Fund Performance, Cross-Sectional Return Dispersion, and Active Share,” 2014, Research in Finance, 30, 1-22., Available at SSRN: https://ssrn.com/abstract=2378072 or http://dx.doi.org/10.2139/ssrn.2378072

David McNeil Smith (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

HOME PAGE: http://www.albany.edu/ciim

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