Short-term Performance Persistence Research Articles

Performance Persistence: Evidence From the Hedge Funds Industry

In this article, we investigated a sample of 773 hedge funds to test performance persistence in different time periods. We bootstrapped on the average monthly returns over successive years over the whole period starting from 01/01/1990 to 01/01/2003. The estimated and simulated return was computed by sampling without replacement. The test is performed 210 times over the actual data through estimated and simulated data. All style categories with a total number of 736 hedge funds showed short-term performance persistence and mean reverting tendency. Specifically, conservative diversified, market defensive, multi-strategy, strategic, arbitrage, long/short equity, market neutral and trading strategies showed non-stationary status. The ADF t- statistics for each category was less than the critical value with 1% significance level. There is no evidence of performance persistence over the successive years among estimated and simulated average returns of winners and losers computed through the bootstrap test of 210 iterations. The test shows that persistence could not be explained by long term mean reversion process through replication without replacement.

A Research Analysis of Hedge Funds Performance Persistence

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.

Does the choice of fund performance measure matter?

ABSTRACTThis paper investigates whether investment strategies using rankings based on different portfolio performance measures lead to different future abnormal returns. A set of 13 commonly used risk-adjusted performance measures is applied to a dataset of US equity mutual funds over the period July 1970 to September 2019. The results show some evidence of short-term performance persistence, suggesting that portfolios formed on different performance measures ex-ante can generate abnormal returns ex-post. A strategy of investing in the top performing funds and shorting the poor performing funds provides positive excess returns and five-factor alphas. However, when adjusting for the momentum factor, there is less evidence of abnormal performance. The results also show that overall there is little difference arising from the use of different performance measures, but with one notable exception: the Rachev ratio.

Portfolio Managers on the Colombian Open-End Mutual Fund Industry: Performance, downside risk and persistence

This study explores whether Colombian mutual funds deliver abnormal risk-adjusted returns and delves on their persistence. Through traditional and downside risk measures based on Modern Portfolio Theory and Lower Partial Moments, this article evaluates the performance of 146 mutual funds categorized by investment type and fund manager. This assessment suggests that mutual funds underperform the market and deliver real returns. Similarly, bond funds underperform equity funds, and investment trusts underperform brokerage firms as managers. Furthermore, bond funds and funds managed by investment trusts exhibit short-term performance persistence. These results suggest that investors may pursue passive investment strategies, and that they must analyze past performance to invest in the short-term.

Can mutual fund managers predict security prices to beat the market?The case of Greece during the debt crisis

The purpose of this paper is to examine the performance of Greek equity mutual funds, elaborating on stock selection in parallel with market timing measures, in comparison with the performance of ETFs and index funds for the period 01/24/2008-05/12/2017, and the short-term performance persistence of actively managed funds for the period 05/12/2015-05/12/2017. Using all domestic equity mutual funds at our disposal and daily data, the authors apply multi-factor models to estimate risk-adjusted returns and to evaluate the selectivity and market timing ability of fund managers. In order to investigate short-term performance persistence, the coexistence of stock selection and market timing strategy is allowed and a battery of parametric and nonparametric tests is implemented. Results show that actively managed mutual funds underperformed the market index, as well as passively managed ETFs and index funds, primarily due to the managers’ inability to time the market. Furthermore, a winner-picking strategy to outperform a-buy-the-market-and hold policy is questioned.

Can Mutual Fund Managers Predict Security Prices to Beat the Market? The Case of Greece During the Debt Crisis

The purpose of this paper is to examine the performance of Greek equity mutual funds, elaborating on stock selection in parallel with market timing measures, in comparison with the performance of ETFs and index funds for the period 01/24/2008-05/12/2017, and the short-term performance persistence of actively managed funds for the period 05/12/2015-05/12/2017. Using all domestic equity mutual funds at our disposal and daily data, the authors apply multi-factor models to estimate risk-adjusted returns and to evaluate the selectivity and market timing ability of fund managers. In order to investigate short-term performance persistence, the coexistence of stock selection and market timing strategy is allowed and a battery of parametric and nonparametric tests is implemented. Results show that actively managed mutual funds underperformed the market index, as well as passively managed ETFs and index funds, primarily due to the managers’ inability to time the market. Furthermore, a winner-picking strategy to outperform a-buy-the-market-and hold policy is questioned.

Mutual funds in Greece: case study of domestic equity mutual funds during a financial crisis

PurposeThe purpose of this paper is to examine the performance of Greek equity mutual funds for the period 2012-2016, analyzing further the selectivity and market timing ability, and short-term performance persistence for the period 2015-2016.Design/methodology/approachUtilizing a survivorship-bias-controlled sample of 25 funds and daily data, the authors use single-index (Jensen, 1968) and multi-factor (Carhart, 1997) models to evaluate risk-adjusted returns using the General Index of Athens Stock Exchange as a benchmark. The Treynor-Mazuy (1966) and Henriksson-Merton (1981) models are used to assess the stock selection and market timing abilities of fund managers. In order to investigate short-term performance persistence, the authors implement a variety of parametric (Bollen and Busse, 2005) and nonparametric tests (Malkiel, 1995; Brown and Goetzmann, 1995; Kahn and Rudd, 1995).FindingsResults show that the funds underperformed the General Index, mainly due to the managers’ market timing inability. Furthermore, weak evidence for short-term performance persistence has been documented.Research limitations/implicationsChecking for performance persistence, it was impossible to rank funds and form deciles according to their estimated abnormal returns, as in Bollen and Busse (2005), due to the small number of mutual funds operating in Greece.Originality/valueEmpirical studies regarding the performance of Greek equity mutual funds are still limited. Therefore, this paper intends to fill this gap by providing further evidence of performance evaluation.

Precision about manager skill, mutual fund flows, and performance persistence

Constructing a measure for imprecision about manager skill, IMP, by standard deviation of multiple performance-based signals, we examine the role of IMP in flow-performance relationship. We find that future fund flows respond more (less) strongly to past performance measured with high (low) precision. Our finding is robust to the inclusion of control variables that are known to affect future fund flows. In addition, short-term performance persistence is observed among funds with lower IMP, implying that our IMP helps identify funds with performance persistence. Overall, our findings indicate that IMP plays a critical role in understanding the cross-section of future flows.

Impact of Advance Notice Periods on the Performance Persistence of Hedge Funds

This paper examines the impact of the advance notice period on hedge fund performance persistence in investors’ portfolios. As investors in hedge funds face several trading restrictions related to the funds’ common investment terms and conditions, it is hypothesized that the advance notice period generates illiquidity for investors and impairs their ability to benefit from performance persistence in hedge funds. Using a sample of 4,788 hedge funds over a period from 1994 to 2008 and contingency table based standard methodology for returns and Sharpe ratios, the results suggest that accounting for individual funds’ advance notice periods has a negative impact on the performance persistence of hedge funds. The proportion of significantly persistent funds declines when incorporating the advance notice period, especially for short time horizons. Furthermore, a considerable part of hedge fund performance persistence is related to asset class-specific terms and conditions, reducing the amount of short-term performance persistence in practice.

Disappearance and Survivorship Bias of Corporate Bond Funds

This is the first paper analyzing the determinants of success and failure on the corporate bond fund market in terms of surviving vis-a-vis disappearance, generating superior performance and attracting investor flows in a consistent framework. Using a large and comprehensive sample of US corporate bond funds with daily returns over a 28-year period, we show that mutual funds optimize fee revenues rather than performance as corporate bond fund investors are relatively fee insensitive. Thus, size, flows and expenses are the most important determinants of survival. Performance only plays a role for the survival of small funds while large funds survive independently of performance. Regarding success in terms of performance, corporate bond funds exhibit short term performance persistence and suffer from diseconomies of scale, however not as severe as equity funds.

Differences in Short-Term Performance Persistence by Mutual Fund Equity Class

To consistently earn positive alpha, active fund managers must have access to mispriced stocks. We show that mispricing varies by equity class in such a way that greater mispricing occurs in smaller-cap and more value-oriented stocks, providing opportunity for managers in these classes. Accordingly, we find the greatest evidence that top-performing mutual fund managers continue to earn positive alpha in smaller-cap and more value-oriented classes when investigating quarterly performance persistence by equity class. Conversely, large cap funds show no evidence of persistence in superior performance. In contrast to the patterns of persistence in superior performance, relative performance persists in all equity classes.

The Short and Long Term Performance Persistence in the Central European Banking Industry

This article investigates the scale of performance persistence in the Central European banking industry. Contrary to the existing literature, we test not only for the short-term performance persistence but we propose also a novel method of analyzing the long-term persistence. Using an extensive dataset, covering the 1992-2009 period, we establish that banks’ results are strongly persistent in two-years sub-periods as well as in the long-run. Moreover, we find that the strength of studied phenomenon is not significantly influenced by the macroeconomic environment, banks size and capital base and country-specific factors.

Mutual Fund Flows, Performance Persistence, and Board Quality

This paper provides evidence on the impact of fund board quality on (a) the fund flow-performance relation, (b) persistence in fund performance, and (c) a fund’s potential change of strategy following a period of underperformance. We use Morningstar’s board quality ratings as a proxy for the quality of the fund’s board and document three main results. One, we show that funds that rank in the bottom quintile of rankings based on past performance, experience significantly lower flows at the margin when their board quality rating is poor compared to when the board quality is rated as good. Two, we document a significant relationship between board quality and short-term performance persistence. For funds with bad boards, a negative past alpha predicts future negative alpha but the evidence of positive performance persistence is much weaker than for funds with good boards. Three, we show that a change in fund strategy following poor performance is more likely for funds with good boards compared to funds with bad boards. These findings extend the Lynch and Musto (2003) hypothesis that suggests that funds may discard those strategies which underperformed in the past. Our contribution is to show that it is the good quality boards that are more likely to affect a change of strategy. Hence, the quality of a fund’s board has an important influence on the incentive to change a fund’s strategy. Taken together our results suggest that recent attempts to provide qualitative information to fund shareholders on dimensions of fund governance quality are indeed warranted and quite valuable from the standpoint of investor decision making.

Performance persistence and its influence on money and investor flows into Spanish pension plans

This article analyzes the phenomenon of performance persistence in Spanish equity pension plans between 1999 and 2006 to determine whether plans with higher performance in one period continue obtaining higher performance in the future. It also aims to determine the influence of past performance on investor behavior in order to examine whether money and investor flows of these portfolios are affected by past performance. The results reveal the existence of short-term performance persistence and a statistically significant relationship between historical returns and investment flows.

Performance persistence of fixed income mutual funds

The “winner-winner, winner-loser, gone” methodology allows tests for short-term performance persistence for government and corporate fixed income mutual funds from 1990 to 1999. Persistence occurs when “winner” (loser) funds remain “winner” (loser) funds. If intermediate-term (long-term) bond returns are higher than long-term (intermediate-term) bond returns for successive years, the z-statistic is positive. Persistence is negative in the opposite case, and the pattern holds for longer lag periods. Statistical significance and consistency between the sign of persistence and bond returns indicates persistent returns on bond funds, but the nature of persistence is driven by changes in interest rates.

Performance persistence of international mutual funds

This study applies the “winner–winner, winner–loser” methodology developed by Brown and Goetzmann, Goetzmann and Ibbotson, and Malkiel to test for short-term performance persistence in international equity mutual funds over the 20-year period from 1977 to 1996. Persistence tests are applied to a database consisting of all international equity funds in existence during this period, varying from a low of 11 (1977) to a high of 473 (1996) funds, reflecting the extremely rapid growth of this asset class over the last 20 years. The authors are not aware of any other persistence studies of international equity funds. The results show statistically significant performance persistence for 1-year holding periods, but no persistence for 2-, 3- or 4-year periods. For 1-year periods, overall, performance persistence is statistically significant at the .001 level. This leads to the conclusion that international equity mutual funds exhibit strong performance persistence for short-term (1-year holding periods), but persistence generally fades after the first year. These results are generally consistent with results found by other researchers using this methodology. Survivorship bias is a concern in virtually all time series studies of mutual fund returns. This bias is minimal in this study because each new fund is added to the database, merging funds continue to be included and adjustments are made for funds that cease operations. The only bias is that if any fund closed and did not merge with an existing fund, that fund would not have returns to be included for the future periods. Only 28 funds ceased operations over the 20-year period during which 490 new funds were introduced.

Persistence of mutual fund operating characteristics: returns, turnover rates, and expense ratios

This study tests persistence of mutual fund returns, turnover rates, and expense ratios over the 20-year period from 1971 to 1990. Multivariate models also are developed to examine synergies among persistence of returns, expense ratios and turnover rates. Potential long-run economies of scale are analysed by determining whether or not there is a significant relationship between asset size and these other operating characteristics. Tests are developed to contrast the decade of the 1970s with the decade of the 1980s and to examine persistence between consecutive years. The results indicate that there was no long-term persistence of returns, expenses, or turnover rates for 151 equity mutual funds that operated over the full two decades from 1971 to 1990. Tests of short-term performance persistence show strong persistence of good performance for periods of one, two and three years. For a four-year time period, there is no significant persistence of returns. The tests for consecutive years in contrast to tests between decades show that there is short-term, but not long-term persistence for returns.