...companies pool dollars from group of investors. Unlike mutual funds, hedge funds are exempt from the Investment Company Act. The growth in the industry and the differences from mutual funds have created a challenging new avenue for performance evaluation.

From a research standpoint, hedge fund performance poses several interesting features. For one, the compensation of a typical hedge fund manager includes a significant performance fee. That is, a share of the fund's returns, often after the fund performance exceeds a "high water mark." These compensation contracts are thought to attract the most highly skilled managers. Therefore, the hedge fund industry should provide a fertile laboratory for detecting superior investment performance. Also, the secretive nature of the industry makes historical data limited and, when available, subject...

NOTE: All illustrations and photos have been removed from this article.



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