The evaluation of hedge fund performance is challenging given the flexible nature of hedge funds' strategies and their lack of operational transparency. As a result inference about skill is inevitably contaminated by the error in the benchmark model. To address this concern, we propose a model...

Recent studies link mutual fund performance to measures of active management, and this evidence often takes the form of large spreads in unconditional alphas for characteristic-sorted portfolios. Unconditional benchmarks can, however, produce misleading inferences on managerial skill for...