Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-19T16:53:23.376Z Has data issue: false hasContentIssue false
  • English
  • Français

Multi-Period Performance Persistence Analysis of Hedge Funds

Published online by Cambridge University Press:  06 April 2009

Vikas Agarwal  and
Narayan Y. Naik
Get access Rights & Permissions [Opens in a new window]

Abstract

Since hedge funds specify significant lock-up periods, we investigate persistence in the performance of hedge funds using a multi-period framework in which the likelihood of observing persistence by chance is lower than in the traditional two-period framework. Under the null hypothesis of no manager skill (no persistence), the theoretical distribution of observing wins or losses follows a binormial distribution. We test this hypothesis using the traditional two-period framework and compare the findings with the results obtained using our multi-period framework. We examine whether persistence is sensitive to the length of return measurement intervals by using quarterly, half-yearly and yearly returns. We find maximum persistence at the quarterly horizon indicating that presistence among hedge fund managers is short term in nature.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 3 , September 2000 , pp. 327 - 342
Copyright
Copyright © School of Business Administration, University of Washington 2000

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

Both authors, London Business School, Sussex Place, Regent's Park, London NWI 4SA, U.K. We thank Ravi Bansal, Stephen Brown (the editor), Jennifer Carpenter, Elroy Dimson, William Goet-zmann (associate editor and referee), David Hsieh, Frans de Roon, Henri Servaes, Fauchier Partners Ltd., and participants at the hedge fund conference at Duke University and Issues in Performance Measurement workshop at the European Institute for Advanced Studies in Management, Brussels for many helpful comments and constructive suggestions. Naik is grateful for funding from Inquire U.K. and the European Commission's TMR program (network ref. ERBFMRXCT 960054). Agarwal is grateful for financial support from the British Council's Chevening scholorship, and the Edward Jones, Frank Russell, and Fauchier Partners scholarships during the past three years in the Ph.D. pro-gram. We are gratful to Bob Potsic of Hedge Fund Research Inc., Chicago for providing the data. We are responsible for all errors.

References

Ackermann, C.; McEnally, R.; and Ravenscraft, D.. “The Performance of Hedge Funds: Risk, Return and Incentives.” Journal of Finance, 54 (06 1999), 833–874.10.1111/0022-1082.00129CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “On Taking the Alternative Route: Risks, Rewards, and Performance Persistence of Hedge Funds.” Journal of Alternative Investments. 2 (Spring 2000a), 6–23.10.3905/jai.2000.318973CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “Generalized Style Analysis of Hedge Funds.” Journal of Asset Management, 1 (04 2000b), 93–109.10.1057/palgrave.jam.2240007CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “On Benchmarking of Hedge Funds with Passive and Option-Based Strate-gies.” IFA Working Paper no. 300, London Business School (03 2000c).Google Scholar
Brown, S. J., and Goetzmann, W. N.. “Performance Persistence.” Journal of Finance, 50 (06 1995), 679–698.10.2307/2329424CrossRefGoogle Scholar
Brown, S. J.; Goetzmann, W. N.; and Ibboston, R. G.. “Offshore Hedge Funds: Survival and Performance 1989–95.” Journal of Business, 72 (01 1999), 91–117.10.1086/209603CrossRefGoogle Scholar
Brown, S. J.; Goetzmann, W. N.; Ibbotson, R. G.; and Ross, S. A.. “Survivorship Bias in Performance Studies.” Review of Financial Studies, 5 (1992), 553–580.10.1093/rfs/5.4.553CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (03 1997), 57–82.10.2307/2329556CrossRefGoogle Scholar
Carpenter, J. N., and Lynch, A. W.. “Survivorship Bias and Attrition Effects in Measures of Performance Persistence.” Journal of Financial Economics, 54 (12 1999), 337–374.10.1016/S0304-405X(99)00040-9CrossRefGoogle Scholar
christensen, R. “Log-Linear Models.” New York, NY: Springer-Verlag (1990).CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “The Persistence of Risk-Adjusted Mutual Fund Performance.” Journal of Business, 69 (04 1996), 133–157.10.1086/209685CrossRefGoogle Scholar
Fund, W., and Hsieh, D. A.. “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds.” Review of Financial Studies, 10 (Summer 1997), 275–302.10.1093/rfs/10.2.275Google Scholar
Goetzmann, W. N., and Ibbotson, R. G.. “Do Winners Repeat?” Journal of Portfolto Management, 20 (Winter 1994), 9–18.10.3905/jpm.1994.409482CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings.” Journal of Business, 62 (07 1989), 393–416.10.1086/296468CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “The Persistence of Mutual Fund Performance.” Journal of Finance, 42 (12 1992), 1977–1984.10.2307/2329005CrossRefGoogle Scholar
Gruber, M. J. “Another Puzzle: The Growth in Actively Managed Mutual Funds.” Journal of Finance, 51 (07 1996), 783–810.10.2307/2329222CrossRefGoogle Scholar
Hendricks, D.; Patel, J.; and Zeckhauser, R.. “Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance 1974–88.” Journal of Finance, 48 (03 1993), 93–130.10.2307/2328883Google Scholar
Liang, B. “Hedge Funds: The Living and the Dead.” Journal of Financial and Quantitative Analysis, 35 (09 2000), 309–326.10.2307/2676206S0022109000009200CrossRefGoogle Scholar
Malkiel, B. “Returns from Investing in Equity Mutual Funds 1971 to 1991.” Journal of Finance, 50 (06 1995), 549–572.10.2307/2329419CrossRefGoogle Scholar
Park, J. M., and Staum, J. C.. “Performance Persistence in the Alternative Investment Industry.” Working Paper, Paradigm Capital Management, Inc. (1998).CrossRefGoogle Scholar