Alpha or beta in the eye of the beholder : what drives hedge fund flows?

Hedge fund flows chase alpha, yet they also follow returns attributable to traditional and exotic risk exposures. Investors appear more cognizant of exotic risks over time, with flows increasing their relative emphasis on returns from exotic betas in recent years. Investors also discriminate between which risks warrant high fees, with flows into high-fee funds being more likely to emphasize returns arising from exotic risks. Although we find strong evidence of persistence for alpha, persistence in hedge fund returns attributable to traditional and exotic risk exposures is modest, which suggests investors would benefit from employing more sophisticated risk models when evaluating fund performance.