Hedge Fund Performance Persistence in Weak and Strong Markets

Summary

The document summarizes research on whether hedge funds that perform well continue to do so, depending on overall market conditions. It describes two performance measures based on returns across hedge fund industries: RET_DOWN for weaker markets and RET_UP for stronger markets. After risk adjustment, funds in the top RET_DOWN group reportedly outperform those in the bottom group over the following year by about 7%. In contrast, stronger RET_UP performance does not predict stronger subsequent results.

The summary also says RET_DOWN predicts fund performance over the next three years, for both winners and losers, and among funds with fewer equity constraints. These findings suggest that performance during weak industry conditions may be more informative about persistence than performance during strong conditions. The document provides only a brief account of the study: it does not describe the data, risk adjustment model, statistical uncertainty, or trading feasibility, so the reported results should not be treated as a tested investment strategy.

Key ideas

• Performance persistence appears to depend on the broader market conditions in which returns occur.
• RET_DOWN measures fund performance in weaker hedge fund industry conditions, while RET_UP captures performance in stronger conditions.
• Risk adjusted top RET_DOWN funds reportedly outperform bottom group funds over the following year.
• RET_DOWN is described as predictive over a three year horizon, including for winners and losers.
• The summary omits methodological details needed to assess robustness or implement a strategy.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.