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Detecting performance persistence of hedge funds

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  • Hentati-Kaffel, Rania
  • de Peretti, Philippe

Abstract

In this paper, we use nonparametric runs-based tests to analyze the randomness and the persistence of relative returns of hedge funds. Runs tests are implemented on a universe of hedge funds extracted from HFR database over the period spanning January 2000 to December 2012. Our findings suggest that i) slightly less than 80% of the studied universe has returns at random, ii) a similar figure is found out when focusing on relative returns, iii) hedge funds that do present clustering in their relative returns are mainly found within Event Driven and Relative Value strategies, iv) and for relative returns, results vary with the type of the benchmark nature (peer group average or traditional). This paper also emphasizes that runs tests may be a useful tool for investors in their fund's selection process.

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  • Hentati-Kaffel, Rania & de Peretti, Philippe, 2015. "Detecting performance persistence of hedge funds," Economic Modelling, Elsevier, vol. 47(C), pages 185-192.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:185-192
    DOI: 10.1016/j.econmod.2015.02.029
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    References listed on IDEAS

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    1. Brown, Stephen J & Goetzmann, William N & Ibbotson, Roger G, 1999. "Offshore Hedge Funds: Survival and Performance, 1989-95," The Journal of Business, University of Chicago Press, vol. 72(1), pages 91-117, January.
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    3. A. Harri & B. W. Brorsen, 2004. "Performance persistence and the source of returns for hedge funds," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 131-141.
    4. Hentati-Kaffel, Rania & de Peretti, Philippe, 2015. "Generalized runs tests to detect randomness in hedge funds returns," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 608-615.
    5. Carpenter, Jennifer N. & Lynch, Anthony W., 1999. "Survivorship bias and attrition effects in measures of performance persistence," Journal of Financial Economics, Elsevier, vol. 54(3), pages 337-374, December.
    6. Agarwal, Vikas & Naik, Narayan Y., 2000. "Multi-Period Performance Persistence Analysis of Hedge Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 327-342, September.
    7. Franklin R. Edwards & Mustafa Onur Caglayan, 2001. "Hedge Fund Performance and Manager Skill," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(11), pages 1003-1028, November.
    8. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, June.
    9. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    Cited by:

    1. Canepa, Alessandra & de la O. González, María & Skinner, Frank S., 2020. "Hedge fund strategies: A non-parametric analysis," International Review of Financial Analysis, Elsevier, vol. 67(C).
    2. María dela O. González & Nicolas A. Papageorgiou & Frank S. Skinner, 2016. "Persistent Doubt: An Examination of Hedge Fund Performance," European Financial Management, European Financial Management Association, vol. 22(4), pages 613-639, September.
    3. Cumming, Douglas & Monteiro, Pedro, 2022. "Hedge fund sales fees and the flow of funds around the world," Economic Modelling, Elsevier, vol. 112(C).

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