Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Academic Findings on Performance Persistence

In Chapter 2 we discussed the focus of academic research on hedge fund performance and how it mostly evaluated the positive portfolio effects of adding hedge funds to institutional portfolios and the basic differences in liquidity, risk, factor exposures, and return characteristics between the dynamic trading styles used by hedge funds and traditional buy-and-hold strategies.

Research on performance persistence, while prevalent, is quite mixed and somewhat controversial. It generally favors the proposition that hedge funds have unique skills and that performance does persist over certain, mostly short-term, time horizons. Brorsen and Harri (2004) used regression analysis tests in 2002 and found persistence in returns over short time horizons. Agarwal and Naik (2000) found that persistence exists at the quarterly time horizon. They found significant quarterly persistence based on the analysis of a large sample of onshore and offshore funds and the use of both parametric and nonparametric test design. Edwards and Caglayan (2001) also found performance persistence using an eight-factor model of persistence. In this case, they found persistence at the one- and two-year time horizons and that persistence existed for both winners with positive performance and losers with negative performance. Bares and associates (2002) used a nonparametric approach and an eight-factor APT model to reach the conclusion that persistence can be observed over ...