Working Paper: NBER ID: w12015
Authors: Ravi Jagannathan; Alexey Malakhov; Dmitry Novikov
Abstract: We examine whether hot hands exist among hedge fund managers. In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund's performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. While we find significant performance persistence among superior funds we find little evidence of persistence among inferior funds.
Keywords: Hedge Funds; Performance Persistence; Empirical Evaluation
JEL Codes: I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hedge fund performance (G23) | Decision to liquidate or close (G33) |
| Liquidation (G33) | Low past performance (D29) |
| Closure (Y20) | High past performance (C52) |
| Inferior funds (lower past performance) (G23) | Likelihood of liquidation (G33) |
| Historical superior relative performance (N23) | Superior future absolute performance (P17) |
| Negative performance persistence (G41) | Little value for investors (G19) |
| Superior funds (higher estimated alphas) (G23) | Higher estimated relative alphas in following period (C58) |