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Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

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  • Sun, Zheng
  • Wang, Ashley W.
  • Zheng, Lu

Abstract

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by approximately 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN measure can predict future fund performance over a horizon as long as 3 years, for both winners and losers and for funds with few share restrictions.

Suggested Citation

  • Sun, Zheng & Wang, Ashley W. & Zheng, Lu, 2018. "Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(5), pages 2199-2225, October.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:05:p:2199-2225_00
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    Cited by:

    1. Stafylas, Dimitrios & Andrikopoulos, Athanasios & Tolikas, Konstantinos, 2023. "Hedge fund performance persistence under different business cycles and stock market regimes," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    2. Ma, Tianyi & Tee, Kai-Hong & Li, Baibing, 2022. "Timing the volatility risk of beta anomaly: Evidence from hedge fund strategies," International Review of Financial Analysis, Elsevier, vol. 81(C).
    3. Jonathan Doh & Pawan Budhwar & Geoffrey Wood, 2021. "Long-term energy transitions and international business: Concepts, theory, methods, and a research agenda," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(5), pages 951-970, July.
    4. Aiken, Adam L. & Kang, Minjeong, 2023. "Hedge fund manager timing and selectivity skill over time. A holdings-based estimate," Finance Research Letters, Elsevier, vol. 58(PB).
    5. Hu, Shiyang & Xiang, Cheng & Quan, Xiaofeng, 2023. "Salience theory and mutual fund flows: Empirical evidence from China," Emerging Markets Review, Elsevier, vol. 54(C).
    6. Malakhov, Alexey & Riley, Timothy B. & Yan, Qing, 2024. "Do hedge funds bet against beta?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1507-1525.
    7. Xu, Bu & Xu, Quanyi & Liu, Xinxin & Qin, Qirui, 2024. "Investor traps: Funds launched during booms," Finance Research Letters, Elsevier, vol. 61(C).
    8. Ekaterini Panopoulou & Nikolaos Voukelatos, 2022. "Should hedge funds deviate from the benchmark?," Financial Management, Financial Management Association International, vol. 51(3), pages 767-795, September.

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