Hedge Fund Strategies: A non-Parametric Analysis

Abstract

We investigate why top performing hedge funds are successful. We find evidence that top performing hedge funds follow a different strategy than mediocre performing hedge funds as they accept risk factors that do and avoid factors than do not anticipate the troubling economic conditions prevailing after 2006. Holding alpha performance constant, top performing funds avoid relying on passive investment in illiquid investments but earn risk premiums by accepting market risk. Additionally, they seem able to exploit fleeting opportunities leading to momentum profits while closing losing strategies thereby avoiding momentum reversal.