Abstract This doctoral thesis aims to contribute to the literature on hedge fund performance and risk by conducting four interrelated essays. The first two essays measure and predict hedge fund performance using novel methodologies based on recent development in portfolio choice techniques. This new way to evaluate fund performance relies on economic theory and robust econometric principles. The first essay exploits hedge fund characteristics in order to pick right funds into a portfolio, whereas the second essay predicts hedge fund performance using conditional information that is contained in macroeconomic variables. The empirical analysis shows that the proposed conditional real-time portfolio strategies deliver significant outperformance over the unconditional benchmark strategy which does not utilize conditional information. The third essay investigates whether a particular hedge fund with specific fund characteristics contributes to systemic risk and how hedge funds with a high systemic risk contribution perform during the times of financial distress. The findings suggest that the fund’s capital structure is related to its systemic risk contribution, and, furthermore, that hedge funds with a high systemic risk contribution tend to deliver extremely poor performance during the times of financial distress. The fourth essay examines the impact of share restrictions on hedge fund performance and risk-taking. The essay finds that hedge funds with a lockup period tend to take excess risk that is not compensated when performance is measured as a unit of risk taken by the hedge fund. In addition, the length of notice periods increases along with the illiquidity level of fund investments. Finally, hedge funds with a long notice period seem to be able to earn an illiquidity premium.