The decomposition of hedge fund returns is hampered by model misspecification. To address

this issue, we develop a novel approach to compare models in a large population of funds. This

comparison, which accounts for misspecification-driven estimation errors, sharpens the separation

between alpha and beta. Our analysis reveals that: (i) prominent models are as misspecified as

the CAPM, (ii) several factors—primarily time-series momentum, variance, carry—capture hedge

fund strategies and lower performance, (iii) alpha and beta components correlate negatively and

vary substantially across funds, consistent with equilibrium models featuring search costs, and (iv)

fund valuation is sensitive to investor sophistication.