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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27401

Title: HEDGE FUND DUE DILIGENCE: A SOURCE OF ALPHA IN A HEDGE FUND PORTFOLIO STRATEGY
Authors: Brown, Stephen J.
Fraser, Thomas L.
Liang, Bing
Keywords: Hedge funds
operational risk
due diligence
alpha
Issue Date: 21-Jan-2008
Series/Report no.: FIN-07-032
Abstract: Due diligence is an important source of alpha in a well designed hedge fund portfolio strategy. It is generally understood that the high returns possible in investing in hedge funds are somewhat offset by the relative lack of transparency on operational issues. The performance of a diversified hedge fund portfolio can be enhanced by excluding those funds likely to do poorly – or fail – due to operational risk concerns. However, effective due diligence is an expensive concern. This implies that there is a strong competitive advantage to those funds of funds sufficiently large to absorb this fixed and necessary cost. The consequent economies of scale that we document in funds of funds are quite substantial and support the proposition that due diligence is a source of alpha in hedge fund investment.
URI: http://hdl.handle.net/2451/27401
Appears in Collections:Finance Working Papers

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