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Persistence in Hedge Fund Performance: The True Value of a Track Record

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  • Harry. M Kat

    (ICMA Centre, University of Reading)

  • Faye Menexe

    (ICMA Centre, University of Reading)

Abstract

In this paper we study the persistence and predictability of several statistical parameters of individual hedge fund returns. We find little evidence of persistence in mean returns but do find strong persistence in hedge funds' standard deviations and their correlation with the stock market. Persistence in skewness and kurtosis is low but this could be due to the small size of the sample used. Despite the observed persistence, our study also shows that in absolute terms hedge funds' risk profiles are not easily predicted from historical returns alone. The true value of a hedge fund's 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 fund's 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.

Suggested Citation

  • Harry. M Kat & Faye Menexe, 2002. "Persistence in Hedge Fund Performance: The True Value of a Track Record," ICMA Centre Discussion Papers in Finance icma-dp2002-13, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2002-13
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2002-13.pdf
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    References listed on IDEAS

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    1. Stephen J. Brown & William N. Goetzmann & Roger G. Ibbotson, 1997. "Offshore Hedge Funds: Survival and Performance 1989-1995," NBER Working Papers 5909, National Bureau of Economic Research, Inc.
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    3. Grinblatt, Mark & Titman, Sheridan, 1992. "The Persistence of Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 47(5), pages 1977-1984, December.
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    5. Goetzmann, W.N. & Ibbotson, R.G., 1990. "Do Winners Repeat? Patterns in Mutual Fund Behavior," Papers fb-_91-04, Columbia - Graduate School of Business.
    6. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    7. Malkiel, Burton G, 1995. "Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, vol. 50(2), pages 549-572, June.
    8. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-157, April.
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    Cited by:

    1. Benjamin R Auer, 2016. "Pure return persistence, Hurst exponents and hedge fund selection – A practical note," Journal of Asset Management, Palgrave Macmillan, vol. 17(5), pages 319-330, September.
    2. Heidorn, Thomas & Hoppe, Christian & Kaiser, Dieter G., 2006. "Heterogenität von Hedgefondsindizes," Frankfurt School - Working Paper Series 71, Frankfurt School of Finance and Management.
    3. El Kalak, Izidin & Azevedo, Alcino & Hudson, Robert, 2016. "Reviewing the hedge funds literature I: Hedge funds and hedge funds' managerial characteristics," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 85-97.

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