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March 28, 2026Studies in Economics and Finance

Active versus passive investment strategy and market outperformance: are hedge funds overrated?

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Authors

JPJulius PauliAGAgnieszka Gehringer

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Overview

This analysis evaluates hedge funds' ability to generate market outperformance in investment strategies, suggesting different value propositions.

Key Points

  • This paper examines whether hedge funds truly outperform the market and what value they provide beyond just alpha generation.
  • Analyzed a sample of 3,828 hedge funds from February 2014 to January 2024.
  • Used asset-pricing frameworks like Jensen's alpha model and the Fama–French multi-factor model.
  • Examined cross-sectional excess returns and market beta exposure.
  • No consistent evidence of market outperformance; average alpha is close to zero.
  • More hedge funds achieved positive excess returns than negative over a 10-year period.
  • Hedge funds often have relatively low market betas, indicating their value is in risk management and diversification.

Cite This Study

Pauli et al. (2026) studied this question.

synapsesocial.com/papers/69c771dd8bbfbc51511e1fabhttps://doi.org/10.1108/sef-09-2025-0670
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