This study empirically investigates the performance of Australian hedge funds by extending and modifying [Capocci, D., Hubner, G., 2004. Analysis of hedge funds performance. Journal of Empirical Finance 11, 55-89]. model. This model performs better in explaining Australian hedge fund returns than the traditional Fama and French three-factor model. The results show that Australian hedge fund returns have low correlation with market indexes and also outperform standard market index returns. We also observe that Australian hedge fund returns are positively related to incentive fees and negatively related to management fees. Further, managers do not have any significant market timing skill and market conditions do not significantly influence hedge fund performance.