An Examination of Hedge Funds Performance Persistence

Abstract

We check for performance persistence of hedge funds in terms of market price average returns in each style category. In addition, we use regression models to test market timing ability. We use a sample of 773 hedge funds both alive and dead to avoid survivorship, self-selection and backfill bias. We include in our sample funds that have stopped to exist or merged with other funds. Positive returns indicate that the manager is skillful in terms of share picking ability. In addition, I am going to test for market timing ability to measure if the fund manager can outperform the market index. The market timing ability is verified using the Treynor – Mazuy (1966) model and denoted by the coefficient gamma. If the coefficient is positive this indicates that the manager has superior timing ability. Based on my regression results, all out of the nine style sectors display a coefficient of market timing ability that is positive and not statistically significant at 5% level. No sectors showed superior timing market ability. Negative values represent inferior or neutral managerial performance. None out of the nine style categories display negative figures. All nine style sectors display positive figures for the share average returns. Positive returns indicate that the manager is skillful in terms of share picking ability.