Abstract
We analyse the drivers of hedge fund performance, focusing simultaneously on fund size, age, lockup period, fund strategies, business cycles and different market conditions, dealing with the omitted variable bias. We use exogenous break points and a switching Markov model to endogenously determine different market conditions. We find that HFs deliver positive alpha only during “good” times, irrespective of their fundamentals. During “bad” times, they minimise their systematic risk. Small and young funds, and those with redemption restrictions deliver higher alpha compared to their peers during “good” times. Finally, specific strategies deliver significantly negative alpha during “bad” times.
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