Investors Learn to Harvest Hedge Fund Return Sources Without High Fees

By Caroline Liinanki

A growing understanding of the composition of hedge fund returns is letting investors capture the return streams of hedge funds through systematic exposure to persistent risk premia (returns above the expected risk-free rate of return). This provides investors with diversification away from equity market risk in a low-cost, liquid and transparent manner, but without the downsides of investing in a hedge fund.

For a long time, hedge fund returns were believed to derive purely from manager skill and clever investment decisions based on active management. However, the academic literature has identified that it is not so much skill as exposure to certain return sources that can explain the majority of returns in certain hedge fund styles.

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