ABSTRACT
This chapter poses essential research questions about hedge funds and discusses hedge fund databases and their inherent biases that create issues for empirical research. Although hedge fund research is a fruitful area for both academics and practitioners, they tend to have very different perspectives. Several important challenges need to be carefully considered. First, investors have their unique objectives and constraints that vary depending on the type of institution. Second, testing methodologies need to be relevant and implementable. Most academic papers compare portfolios that include hundreds of funds. Thus, their findings may have little value for an investor who plans to hire three to five hedge funds. Hedge fund researchers use empirical hedge fund data to answer portfolio management questions such as the existence of skill among hedge fund managers, persistence in their performance, and identifying a portfolio construction edge. Thus, it is critical to understand hedge fund data and potential issues that arise in empirical research.
