Managerial Performance Persistence of Hedge Funds

Abstract

This article examines performance persistence of 773 hedge funds from the period 1990 to 2003. The sample is free of survivorship bias, backfill, and selection bias. We find evidence of managerial positive performance persistence using multi-factor models. Performance is measured by Jensen’s alpha based on regression models such as the CAPM, Fama and French,(1993), three-factor model, Carhart, (1997), four- factor model and Guirguis,(2005), six-factor model. A positive value of Jensen’s alpha means that the fund manager has outperformed the market index. A negative value of Jensen’s alpha shows inferior performance. The significant t-statistic is a sign of stock picking ability based on skills and not on luck. Positive alphas measure the contribution of the manager to the performance of the fund. Thus, a positive and statistically significant alpha indicates superior managerial performance persistence of the fund. Negative values or statistically insignificant values represent inferior or neutral managerial performance persistence. Based on CAPM regression results, all style categories display alpha that is positive and not statistically significant at 5% level. Based on Fama and French,(1993), three factor model regression results, seven out of nine categories display a significant alpha. Based on Carhart’s ,(1997), four - factor model, eight out of nine style categories display an alpha that is positive and statistically significant at the 5% significance level. Based on my regression results or Guirguis, (2005), six - factor model all style categories display an alpha that is positive and statistically significant at the 5% significance level.