A Research Analysis of Hedge Funds Performance Persistence

Abstract

The existing literature of performance persistence of hedge funds is mixed due to different methodologies and findings. We use a comprehensive sample of 736 hedge funds to test performance persistence in different time periods. The total sample includes 773 hedge funds. We sort funds into rank portfolios based on past performance. A positive and statistically significant alpha indicates a skilled fund manager whose decisions add value to the fund. On the other hand, negative alpha values or statistically insignificant values represent inferior or neutral performance of the manager. The results show short-term performance persistence over one year period for winners. Nine style categories show a positive and statistically significant alpha at the 5% significance level and market timing ability for winners the first 12 months. We did not find any evidence of performance persistence over the long-term. All the remaining years such as the third, the fifth, and the twelfth show insignificant alpha and market timing ability for both winners and losers. The persistence of winners could be justified by the skill of the fund managers and market timing ability to predict the movement of the market.