Summary of Returns to Active Management

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Returns to Active Management summary

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  • Analytical
  • Scientific
  • Background


Hedge funds have made enormous fortunes for their managers, if not always for their investors. Perhaps due to their relative lack of transparency, these funds benefit from a sort of exceptional bias, where the outsize returns of a few get a lot of attention, while the general mediocrity of the rest receives less notice. Economists Maziar Kazemi and Ergys Islamaj – with the use of some fancy mathematics to help pull back the veil – explain how trading activity and risk affect hedge fund managers’ returns. getAbstract recommends their insights to analysts, investors and fund managers who might need to reconsider their strategies.

About the Authors

Maziar Kazemi is a senior research assistant with the Board of Governors of the Federal Reserve System. Ergys Islamaj is an assistant professor of economics at Vassar College.


If markets are efficient and asset managers equally capable, the returns of more active managers will be lower than those of less active managers, as the additional transaction costs of more frequent trading should outweigh any improved performance. In the case of hedge funds, which deduct both management fees and performance bonuses from investors’ returns, the effect should be even more pronounced. Yet judging from mushrooming hedge fund assets under management since the late 1990s – growing ...

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