Do Swedish hedge funds outperform the market

Abstract: Using return data during the period February 2004 to January 2007 we examine abnormal performance for 16 Swedish hedge funds. In order to do this we estimate individual Jensen alphas employing three different asset pricing models; the CAPM, the Fama-French three-factor model and a conditional six-factor model. The time-varying six-factor model is based on factors and instruments in a combination never previously used for this purpose. We find that none of the studied hedge funds have delivered returns that could not be explained by the utilized models. Furthermore, we argue that the CAPM and the Fama-French three-factor model are inappropriate when it comes to evaluating hedge fund performance due to poor explanatory power. The additional factors and the ability to account for time-varying factor exposure in the six-factor model makes it superior at explaining the dynamic trading strategies associated with hedge funds.