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Hedge fund performance and persistence in bull and bear markets

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Author Info

  • Daniel Capocci
  • Albert Corhay
  • Georges Hubner

Abstract

This paper tests the performance of 2894 hedge funds in a time period that encompasses unambiguously bullish and bearish trends whose pivot is commonly set at March 2000. The database proves to be fairly trustable with respect to the most important biases in hedge funds studies, despite the high attrition rate of funds observed in the down market. An original ten-factor composite performance model is applied that achieves very high significance levels. The analysis of performance indicates that most hedge funds significantly outperformed the market during the whole test period, mostly thanks to the bullish subperiod. In contrast, no significant underperformance of individual hedge funds strategies is observed when markets headed south. The analysis of persistence yields very similar results, with most of the predictability being found among middle performers during the bullish period. However, the 'Market Neutral' strategy represents a remarkable exception, as abnormal performance is sustained throughout and significant persistence can be found between the 20% and 69% best performers in this category, probably thanks to an extreme adaptability and a very active investment behaviour.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286676
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 11 (2005)
Issue (Month): 5 ()
Pages: 361-392

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Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:361-392

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Related research

Keywords: Hedge funds; funds of funds; selection bias; abnormal returns; bullish market; bearish market; persistence;

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References

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  1. Stephen J. Brown, 2001. "Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry," Journal of Finance, American Finance Association, vol. 56(5), pages 1869-1886, October.
  2. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
  3. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 291-307, September.
  4. Fabozzi, Frank J & Francis, Jack C, 1979. "Mutual Fund Systematic Risk for Bull and Bear Markets: An Empirical Examination," Journal of Finance, American Finance Association, vol. 34(5), pages 1243-50, December.
  5. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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Citations

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Cited by:
  1. Khaled Guesmi & Saoussen Jebri & Abdelkarim Jabri & Frédéric Teulon, 2014. "Are hedge funds uncorrelated with financial markets? An empirical assessment," Working Papers 2014-103, Department of Research, Ipag Business School.
  2. Wilkens, Marco & Yao, Juan & Jeyasreedharan, Nagaratnam & Oehler, Patrick, 2013. "Measuring the performance of hedge funds using two-stage peer group benchmarks," Working Papers 2013-18, University of Tasmania, School of Economics and Finance, revised 01 Jun 2013.
  3. repec:hal:cesptp:hal-00984777 is not listed on IDEAS
  4. Darolles, Serge & Vaissié, Mathieu, 2012. "The alpha and omega of fund of hedge fund added value," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1067-1078.
  5. Huyen Nguyen-Thi-Thanh, 2007. "Assessing Hedge Fund Performance: Does the Choice of Measures Matter?," Working Papers halshs-00184814, HAL.
  6. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Performance hypothesis testing with the Sharpe ratio: The case of hedge funds," Finance Research Letters, Elsevier, vol. 10(4), pages 196-208.
  7. Wegener, Christian & von Nitzsch, Rüdiger & Cengiz, Cetin, 2010. "An advanced perspective on the predictability in hedge fund returns," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2694-2708, November.
  8. Chen, Li-Wen & Chen, Fan, 2009. "Does concurrent management of mutual and hedge funds create conflicts of interest?," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1423-1433, August.
  9. Anastasia Petraki & Anna Zalewska, . "With whom and in what is it better to save? Personal pensions in the UK Abstract: This paper studies the relationship between fund and provider characteristics, and fund performance using a sample of ," The Centre for Market and Public Organisation 13/304, Department of Economics, University of Bristol, UK.
  10. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Robust evidence on the similarity of Sharpe ratio and drawdown-based hedge fund performance rankings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 153-165.
  11. Benoît Dewaele & Hugues Pirotte & N. Tuchschmid & E. Wallerstein, 2011. "Assessing the Performance of Funds of Hedge Funds," Working Papers CEB 11-041, ULB -- Universite Libre de Bruxelles.
  12. Eling, Martin & Faust, Roger, 2010. "The performance of hedge funds and mutual funds in emerging markets," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1993-2009, August.

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