Investment funds: What next?

Investment funds provide a low cost method of sharing in the rewards from capitalism. Recently “alternative investments” such as hedge funds have grown rapidly and the trading strategies open to hedge funds are now becoming available to mutual funds and even to ordinary retail investors. In this paper we analyze problems in assessing fund performance and the prospects for investment fund sectors. Choosing genuine outperformers among top funds requires a careful assessment of non-normality, order statistics and the possibility of false discoveries. The risk adjusted performance of the average hedge fund over the last 10-15 is actually not that impressive, although the “top” funds do appear to have statistically significant positive alphas.