Hedge funds are now established investment instruments in the asset management world. The author identifies three main questions: i) What kind of asset pricing models are adequate to measure the performance of hedge funds, what kind of properties do they possess ii) if we are able to identify suitable asset pricing models to measure the performance of hedge funds, what kind of performance we are actually detecting? Do hedge funds exhibit higher abnormal returns as it is usually stated iii) if we are able to detect a superior risk adjusted performance, is this performance persistent? Or stated differently, is the past risk adjusted over performance helpful for future performance?In an extensive theoretical and empirical analysis the authors shows that the consistent measure of the performance of hedge funds fails already in the first step, since no asset pricing model is statistically significant and hence, according to the strict conditions of capital market theory, they are unsuitable for measuring performance.Although these performance models, strictly according to the capital market theory, are not suitable for measuring performance, one can still ask the question as to whether hedge funds exhibit a superior performance against some common benchmark or performance attribution models. This excess returns is then, strictly speaking, not an alpha in terms of capital market theory, rather a relative outperformance compared to this benchmark or performance attribution model. The author shows that a small excess return, measured against such factor models is prevalent. However, the persistence of the excess returns is weak and most probably not economically exploitable. The results are robust against alternative factor models, both linear and regime-switching model and against parametric and non-parametric methods
