Yale Study: Alpha Gives Big Bang For Buck

Naysayers often charge that hedge funds don't actually produce alpha, accusing them of basically stealing investor money in the form of sky-high fees. But a new study indicates that HFs do, in fact, give investors some bang for their buck. The report, The ABCs of Hedge Funds by Yale School of Management Professor Roget Ibbotson and Peng Chen at Ibbotson's old firm, Ibbotson Associates, shows that hedge funds, on average, produce 3.04% in excess returns annually and the study controls for survivorship bias and backfill. The researching pair used data from January 1995 through April 2006. The study did find that, correcting for survivorship and backfill, the average 16.45% return for 3,500 hedge funds falls by roughly half, to 8.98%. Still, that's substantially better than the roughly 6% the authors estimate you would earn in an index fund. Alpha lives!