Hedge Fund Alpha – Net Zero Using a Dynamic Factor Approach

Using a novel database, the NilssonHedge hedge fund database covering more than 350,000 return observations, we perform a large-scale multiple regression. We evaluate alpha against the Fama French five-factor model including momentum. Our findings are compatible with a net-zero alpha from hedge funds after fees, assuming frictionless factor implementation. On the positive side, our analysis reveals a substantial divergence between funds, leaving room for timing and selection opportunities within most of the strategies.