Investments, tenth edition

   Liquidity and Hedge Fund Performance 

 One explanation for apparently attractive hedge fund performance is liquidity. Recall from 

Chapter 9 that one of the more important extensions of the CAPM is a version that allows 

for the possibility of a return premium for investors willing to hold less liquid assets. 

Hedge funds tend to hold more illiquid assets than other institutional investors such as 

mutual funds. They can do so because of restrictions such as the lock-up provisions that 

commit investors to keep their investment in the fund for some period of time. Therefore, 

it is important to control for liquidity when evaluating performance. If it is ignored, what 

 Table 26.3 

 Index model regressions for hedge fund indexes 

  Estimation period: January 2005–November 2011  

 Source: Authors’ calculations using data downloaded from Hedge Fund Research Inc.,  www.hedgefundresearch.com , March 2012.