Alpha and Beta of Long/Short Equity Hedge Funds: A Study of Swedish and International Funds

Abstract

As shown in the literature, delivering alpha over time and in different market environments is very difficult and relatively few managers have the ability to do so. Empirical analysis has shown that the main drivers of return for Long/Short Equity hedge funds are a stock market factor and the spread between small- and large capitalization stocks. We find that Swedish Long/Short Equity hedge funds outperformed their international peers during the financial crisis in June 2007 - December 2008 but underperformed during the previous equity bull market April 2003 - May 2007. The reason for this is found to be a lower beta to the broad equity market for Swedish funds. Funds started during 2004 - 2005 operated with a higher beta to the Swedish stock market during the equity bear market compared to funds started before April 2003. Our regression model can explain 65% of the returns of the funds during the bear market period and the stock market is the only statistically significant factor. The capability to generate alpha is found to be limited and concentrated to the equity bull market.