Performance persistence and the source of returns for hedge funds

Abstract

Hedge funds exhibit performance persistence if some funds have consistently higher returns than others. Several procedures are used to determine if performance persists. The results show that performance persists in hedge funds with some funds showing the greatest persistence across all procedures. The results also indicate a strong negative relation between hedge fund capitalization and returns, which is consistent with the hypothesis that hedge fund managers exploit market inefficiencies.

The Performance Persistence of Equity Long/Short Hedge Funds

“…To obtain a clearer picture, at a minimum, persistence of raw returns and risk-adjusted returns have to be distinguished. Harri and Brorsen (2004) report short-term persistence of three to four months with the biggest effect in the first month based on simple regressions of returns on lagged returns.…”

The lifecycle of hedge funds

“…In other words, certain transactions may only be profitable when executed in low volumes. 24 Harri and Brorsen, 8 Agarwal et al, 25 Goetzmann et al, 26 Getmansky, 27 Ammann and Moerth, 28 and Fung et al 29 have found that hedge fund profits decrease as market capitalisation increases. 30 According to Berk and Green's 31 rational model of active portfolio management, decreasing returns in poorly performing funds lead to fund transfers into better performing funds, and thus helps decrease performance over time.…”

Recent advances in hedge funds' performance attribution: Performance persistence and fundamental factors

“…Another important element is that some strategies appear to be more consistent than others (Eling, 2009;Brown and Goetzmann, 2003;Harri and Brorsen, 2004). This is a point that is intuitively logical, especially for non-directional strategies.…”

“…More details concerning the nature of this short-term persistence are still emerging, for example there is differential persistence between different strategies (Harri and Brorsen, 2004;Eling, 2009) and between different fund characteristics such as size (Joenvaara, Kosowski and Tolonen, 2012).…”