Hedge Fund Alphas: Do they reflect manager skills ormere compensation for liquidity risk bearing?

In this article, we study the effect of liquidity risk on the performanceof various hedge fund portfolio strategies. The portfolio strategies in eachhedge fund style are formed by incorporating predictability in: (i) managerialskills, (ii) fund risk loadings, and (iii) benchmark returns. As inAvramov et al. (2007), we find that, before taking into account the effectof liquidity risk, long-only constrained hedge fund style portfolios thatincorporate predictability in managerial skills generate superior performance.However, the outperformance disappears or weakens dramaticallyfor seven out of ten types of hedge fund style portfolios once the effect ofliquidity risk is incorporated into the performance evaluation framework.[...]