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The last decade has challenged the paradigm of the hedge fund industry as a unique performer. We identify three main factors that have affected the operation of hedge funds: competition from mutual funds, the market environment, and tighter regulation. Recent trends in the financial industry have moved asset managers closer to hedge funds by introducing similar underlying strategies, such as liquid alternative funds, to directly compete with hedge funds. We find that such strategies can achieve performance similar to that of hedge funds, thus introducing more competition for hedge funds. Moreover, we find that several hedge fund styles that have traditionally worked well in crisis times—even in the last decade—are also strategies that can be replicated by liquid alternatives. Together with tighter regulation and a strong market environment, these developments continue to put pressure on the hedge fund industry. Our empirical findings add to the existing debate on the performance of hedge funds and the direct competition from liquid alternatives.

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