We show that most hedge fund managers are passive, not active. Active management should be manifest through nonlinear exposure to the systematic risk factors that drive hedge fund returns which leads to enhanced performance. We find that approximately two-thirds of hedge funds exhibit only linear factor exposures and hence are “passive”. What’s more, such “passive” managers tend to outperform “active” managers. Finally, we also show that many “active” managers, despite initial nonlinear risk exposures, eventually become “passive”.
This Working Paper was produced by the CSIRO-Monash Superannuation Research Cluster a collaboration between the CSIRO and Monash University, the University of Western Australia, Griffith University and the University of Warwick in the United Kingdom. In addition, the Cluster engages on an ongoing basis with a range of industry supporters, government agencies and industry peak bodies who assist in providing guidance and feedback to researchers, providing data, and in disseminating outcomes. The purpose of the Super Research Cluster is to examine issues pertaining to the future of Australia’s superannuation and retirement systems.