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Predicting hedge fund performance when fund returns are skewed

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  • Andrea J. Heuson
  • Mark C. Hutchinson
  • Alok Kumar

Abstract

We show that fund‐specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures underestimate (overestimate) managerial performance when returns exhibit positive (negative) fund‐specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk‐adjusted outperformance is 5.5%.

Suggested Citation

  • Andrea J. Heuson & Mark C. Hutchinson & Alok Kumar, 2020. "Predicting hedge fund performance when fund returns are skewed," Financial Management, Financial Management Association International, vol. 49(4), pages 877-896, December.
    • Handle: RePEc:bla:finmgt:v:49:y:2020:i:4:p:877-896
    DOI: 10.1111/fima.12304
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