Year: 2025
Type: article
Abstract: This study sheds light on critical but often overlooked risks in hedge fund performance, such as liquidity mismatches, operational flaws, and extreme event exposures, which can distort traditional evaluation metrics. By combining a quantitative analysis of survivorship-bias-adjusted hedge fund data (2000–2024) with qualitative insights from over 50 industry professionals, including fund managers, investors, and regulators, this study reveals three key hidden risk dimensions: liquidity challenges, data biases, and regulatory gaps, which together explain 68% of performance misrepresentations. Traditional measures, such as the Sharpe ratio, were found to overstate risk-adjusted returns by 10–20% once these hidden risks were accounted for. Role-based analysis highlighted differing perspectives: regulators pushed for transparency (p = 0.003), while managers were wary of conventional tools due to their firsthand exposure to these risks (p = 0.015). To address these issues, this study proposes practical solutions, including a liquidity-adjusted Sharpe ratio and an operational risk dashboard, along with policy recommendations for more transparent disclosures regarding illiquid assets, fees, and leverage. Overall, this study offers a more realistic, resilience-focused approach to hedge fund evaluation that aims to strengthen investor protection and reduce systemic risk.
Authors: Mudit Srivastava, Parul Tandan
Institution: Dayananda Sagar Business Academy
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4410207165