Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T11:59:50.624Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  20 August 2018

Zheng Sun ,
Ashley W. Wang  and
Lu Zheng
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2199 - 2225
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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

1

The views presented here are solely those of the authors and do not represent those of the Federal Reserve Board or its staff. We thank George Aragon, Turan Bali, Michael Brennan, Stephen Brown (the editor), Charles Cao (the referee), Yong Chen, Bing Liang, Cristian Tiu, and seminar participants at Aoyama Gakuin University, Bank de France, Bank of England, the 2013 Borsa Istanbul Finance and Economics Conference (BIFEC), Cheung Kong Graduate School of Business, Federal Reserve Board, Frankfurt School of Finance and Management, George Mason University, Hong Kong Polytechnic University, Hong Kong University, the 2014 International Finance and Banking Society (IFABS) Conference, Shanghai Advanced Institute of Finance (SAIF), Tsinghua University, University of California at Irvine, and University of Massachusetts Amherst.

References

Agarwal, V.; Daniel, N.; and Naik, N.. “Role of Managerial Incentives and Discretion in Hedge Fund Performance.” Journal of Finance, 64 (2009), 2221–2256.Google Scholar
Agarwal, V., and Naik, N.. “Multi-Period Performance Persistence Analysis of Hedge Funds.” Journal of Financial and Quantitative Analysis, 35 (2000), 327–342.Google Scholar
Aggarwal, R., and Jorion, P.. “The Risk of Emerging Hedge Fund Managers.” Journal of Investing, 18 (2009), 100–107.Google Scholar
Aragon, G.“Share Restriction and Asset Pricing: Evidence from the Hedge Fund Industry.” Journal of Financial Economics, 83 (2007), 33–58.Google Scholar
Berk, J., and Green, R.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.Google Scholar
Bollerslev, T., and Todorov, V.. “Tails, Fears, and Risk Premia.” Journal of Finance, 66 (2011), 2165–2211.Google Scholar
Boyson, N.; Stahel, C.; and Stulz, R.. “Hedge Fund Contagion and Liquidity Shocks.” Journal of Finance, 55 (2010), 1789–1816.Google Scholar
Brown, S.; Goetzmann, W.; and Ibbotson, R.. “Off-Shore Hedge Funds: Survival and Performance.” Journal of Business, 72 (1999), 91–117.Google Scholar
Brown, S.; Goetzmann, W.; and Ross, S.. “Survival.” Journal of Finance, 50 (1995), 853–873.Google Scholar
Brunnermeier, M., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 2013–2040.Google Scholar
Cao, C.; Chen, Y.; Liang, B.; and Lo, A.. “Can Hedge Funds Time Market Liquidity?” Journal of Financial Economics, 109 (2013), 493–516.Google Scholar
Carhart, M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chen, Y., and Liang, B.. “Do Market Timing Hedge Funds Time the Market?” Journal of Financial and Quantitative Analysis, 42 (2007), 827–856.Google Scholar
Cooper, M.; Gutierrez, R.; and Hameed, A.. “Market States and Momentum.” Journal of Finance, 59 (2004), 1345–1366.Google Scholar
De Souza, A., and Lynch, A.. “Does Mutual Fund Performance Vary over the Business Cycle?” Working Paper, New York University (2012).Google Scholar
Ferson, W., and Schadt, R.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425–461.Google Scholar
Fung, W., and Hsieh, D.. “The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers.” Review of Financial Studies, 14 (2001), 313–341.Google Scholar
Fung, W.; Hsieh, D.; Naik, N.; and Ramadorai, T.. “Hedge Funds: Performance, Risk, and Capital Formation.” Journal of Finance, 63 (2008), 1777–1803.Google Scholar
Getmansky, M.; Lo, A.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns.” Journal of Financial Economics, 74 (2004), 529–609.Google Scholar
Glode, V.“Why Mutual Funds Underperform?” Journal of Financial Economics, 42 (2011), 297–421.Google Scholar
Glode, V., and Green, R.. “Information Spillovers and Performance Persistence for Hedge Funds.” Journal of Financial Economics, 101 (2011), 1–17.Google Scholar
Glode, V.; Hollifield, B.; Kacperczyk, M.; and Kogan, S.. “Time-Varying Predictability in Mutual Fund Returns.” Working Paper, University of Pennsylvania (2012).Google Scholar
Grinblatt, M., and Keloharju, M.. “What Makes Investors Trade?” Journal of Finance, 56 (2001), 589–616.Google Scholar
Jagannathan, R.; Malakhov, A.; and Novikov, D.. “Do Hot Hands Exist among Hedge Fund Managers? An Empirical Evaluation.” Journal of Finance, 65 (2010), 217–255.Google Scholar
Jiang, H., and Kelly, B.. “Tail Risk and Hedge Fund Returns.” Working Paper, University of Chicago (2013).Google Scholar
Joenväärä, J.; Kosowski, R.; and Tolonen, P.. “Hedge Fund Performance: What Do We Know?” Working Paper, Imperial College (2014).Google Scholar
Kacperczyk, M.; Van Nieuwerburgh, S.; and Veldkamp, L.. “A Rational Theory of Mutual Funds’ Attention Allocation.” Econometrica, 84 (2016), 571–626.Google Scholar
Kacperczyk, M.; Van Nieuwerburgh, S.; and Veldkamp, L.. “Time-Varying Fund Manager Skill.” Journal of Finance, 69 (2014), 1414–1441.Google Scholar
Kosowski, R.“Do Mutual Funds Perform When It Matters Most to Investors? U.S. Mutual Fund Performance and Risk in Recessions and Expansions.” Quarterly Journal of Finance, 1 (2011), 607–664.Google Scholar
Kosowski, R.; Naik, N.; and Teo, M.. “Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis.” Journal of Financial Economics, 84 (2007), 229–264.Google Scholar
Lamont, O., and Thaler, R.. “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs.” Journal of Political Economy, 111 (2003), 227–268.Google Scholar
Liang, B.“Hedge Funds: The Living and the Dead.” Journal of Financial and Quantitative Analysis, 35 (2000), 309–326.Google Scholar
Liang, B., and Park, H.. “Share Restriction, Liquidity Premium, and Offshore Hedge Funds.” Working Paper, University of Massachusetts (2008).Google Scholar
Moskowitz, T.“Discussion of Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses.” Journal of Finance, 55 (2000), 1695–1704.Google Scholar
Park, Y.“Volatility of Volatility and Tail Risk Premiums.” Journal of Financial Markets, 26 (2015), 38–63.Google Scholar
Schmalz, M., and Zhuk, S.. “Revealing Downturns.” Working Paper, University of Michigan (2013).Google Scholar
Sun, Z.; Wang, A.; and Zheng, L.. “The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance.” Review of Financial Studies, 25 (2012), 96–143.Google Scholar
Titman, S., and Tiu, C.. “Do the Best Hedge Funds Hedge?” Review of Financial Studies, 24 (2011), 123–168.Google Scholar
Treynor, J., and Black, F.. “How to Use Security Analysis to Improve Portfolio Selection.” Journal of Business, 46 (1973), 66–86.Google Scholar
Supplementary material: File

Sun et al. supplementary material

Sun et al. supplementary material 1

Download Sun et al. supplementary material(File)
File 514.2 KB