Penny-wenny

If CAPM is correct, then market neutral hedge funds at an average should earn the riskless rate. Leverage for a market-neutral portfolio does not matter in a CAPM world. All it does is to increase idiosyncratic risk, for which there should be no extra return according to CAPM.

So at least one of the following two statements is incorrect:

1) CAPM is true
2) Market-neutral hedge funds earn an average return greater than the riskless rate.

If I were to guess, I would say that 1) is definitely incorrect, and 2) is also likely incorrect.

NC