Edito

Dear readers,

Hedge Fund research is today one of the most active and challenging area of research in the field of investment research. Indeed, most of the academic papers on Hedge Funds were originally direct extensions of studies related to mutual funds. But the latest literature developments are interestingly focused on the particularities of the Hedge Funds investment vehicles. We can already find a bunch of papers on the different liquidity issues related to these funds, both on the market and the funding sides. The propagation of risks between Hedge Funds via Conta­gion phenomena is among the topics treated by the current literature. And last but not least, the design of optimal incentive fees structures is an example of the new research topics related to the Hedge Funds industry. The major consequence is the emergence of specific needs. Generic topics such as funds performance and portfolio risk measurement are directly impacted and sophisticated approaches are developed to optimally solve these important practical concerns in the Hedge Funds environ­ment. The filtering of time varying alphas and betas from reported returns can be cited as the first example of this evolution.

This special issue of BMI includes guest contributions from renowned researchers in the field. In the hedge fund context, the measure of alpha is not an easy task. Hughes Pirotte and Nils Tuchschmid tackle this problem and review the existing literature in the first contribution of this volume. Of course, performance measurement exercise is constrained upon the data availability. Vikas Agarwal, Vyacheslav Fos and Wei Jiang analyze hedge fund performance before “birth” and after “death”, i.e. when hedge funds do not self-report their performances to commercial database. Gilles Criton and Olivier Scaillet adapt to the hedge funds universe a recent performance measu­rement technique that controls for the proportion of true alphas. In particular, they cover the specificities of hedge funds dynamics in considering time varying betas. Monica Billio, Lorenzo Frattarolo and Loriana Pelizzon use a Markov Switching model to obtain time varying alphas, both for the whole industry and for hedge funds stra­tegies. Interestingly, they find that hedge fund ability to generate alphas has been highly affected by crises, and in particular by the recent financial turmoil. Finally, in the last contribution of this issue, Roberto Savona investigates contagion dynamics between hedge funds during these crises. He provides a red flag system that can help hedge funds portfolio managers to build diversified portfolios.