Persistence in Hedge Fund Performance

Abstract

In this article, the authors study the persistence and predictability of several statistical parameters of individual hedge fund returns. The authors find little evidence of persistence in mean returns but do find strong persistence in hedge funds9 standard deviations and their correlation with the stock market. Persistence in skewness and kurtosis is low, but this could well be due to the relatively small size of our sample. Despite the observed persistence, this study also shows that in absolute terms hedge funds9 risk profiles are not easily predicted from historical returns alone. The true value of a hedge fund9s track record therefore appears not to lie in its use as a predictor of future performance and risk, but primarily in the insight that it provides in a fund9s risk profile relative to that of other funds in the same strategy group. The availability of a track record is important, but for a different reason than many investors think.