We often talk about hedge funds as if they form some sort of natural kind, possessed of an essential characteristic not shared with other investments. So one regularly sees news stories with headings such as “Hedge funds return 3% in March”, “How risky are hedge funds?”, “Why you should invest in hedge funds”, and so on. Are these sorts of generalisations useful? There has always been a debate about what exactly defines hedge funds, and indeed, if anything does. This debate goes back to early questions about whether hedge funds are correctly regarded as an asset class. More recently, writers such as veteran Wall Street risk manager Richard Bookstaber have suggested that hedge funds lack any sort of common core – and that that is precisely what distinguishes them. And work on hedge fund replication and alternative betas has given us a much more sophisticated understanding of the naïve notions of alpha and of skill, taking us beyond a simplistic identification of hedge funds with either of these slippery concepts.
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