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E C O N O M I C R E V I E W Fourth Quarter 2006
It could be said that the hedge fund industry, compared to its brethren in the
asset management arena, was in its infancy up until a decade ago. Information
about these funds, both qualitative and quantitative, was not freely available to the
general investment public until academic research on hedge funds started in the
1990s, with Fung and Hsieh (1997), Eichengreen et al. (1998), Schneeweis and Spurgin
(1998), Ackermann, McEnally, and Ravenscraft (1999), and Brown, Goetzmann, and
Ibbotson (1999).
At the turn of the century, coinciding with the bursting of the Internet bubble,
institutional investors began increasing their allocation to hedge funds, responding in
part to the lackluster performance of global equity markets. As a result, assets under
management (AUM) by the hedge fund industry grew exponentially, and the number
of hedge funds doubled over the past five years, by some estimates.1 Consequently,
institutional investors figure more prominently in the industry’s clientele. This clien-
tele shift in turn precipitated profound changes in the way hedge funds operate—
such as increased transparency, better compliance, and higher operational standard,
to name just a few. Some have referred to this change as the “institutionalization” of
the hedge fund industry.
Accompanying these changes came the rising demand for rigorous research into
hedge fund performance. At the same time publicly available hedge fund databases
became ubiquitous. Together they have spawned a fast-growing body of published
studies on hedge funds—professional as well as academic. Although there is no official
count of academic papers on hedge funds, a reasonable conjecture is that their num-
bers have grown at an even faster pace than the hedge fund industry.
This paper provides an overview, albeit somewhat biased, on a particular school
of thought in this growing body of hedge fund research. The school of thought to
which we refer is the thesis put forward in Fung and Hsieh (1999) on