Hedge Fund Performance During and After the Financial Crisis

Persistence in performance is a sought-after metric by Fund Managers and investors. Brown et al. (1999), using annual returns of offshore hedge funds, found virtually no persistence in their sample. Agarwal and Naik (2000) used a multi-period framework for evaluating persistence as a measure of evaluating manager skills, since fund managers might exhibit a different degree of persistence at different return horizons. They found maximum persistence at a quarterly horizon, indicating that persistence among hedge fund managers is short-term in nature. They also find that persistence, whenever present, is unrelated to the type of strategy (directional or non-directional) followed by the fund. Boyson (2003) finds that a portfolio of funds selected on past performance, alone, shows no persistence, but a portfolio that is long low-tenure/past good performers and short high-tenure/past poor performers, displays a quarterly persistence. Consistently poor performance among high-tenure/past poor performers drives this finding. Capocci (2002), on the other hand, concluded that there is no evidence of persistence in low performing and high performing hedge funds, but limited evidence of persistence for medium performing funds. Baquero et al. (2005) find positive persistence in hedge fund returns at the quarterly level, after correcting for investment style, however, with weak statistical significance. Manser and Schmid (2009) studying the performance persistence of equity long/short hedge funds find that funds with the highest raw returns in the previous year, continue to outperform over the subsequent year, although not significantly, and there is no persistence in returns, beyond one year. In contrast, they find performance to be persistent, based on risk-adjusted return measures, such as the Sharpe Ratio, and in particular, also with an alpha from a multifactor model. Funds with the highest risk-adjusted performance, continue to significantly outperform in the following year. The persistence does not last longer than a year, except for the worst performers. Sun et al. (2016) constructed two performance measures: Downside Returns and Upside Returns. After controlling for the overall hedge fund market return and risk, and other fund characteristics, they find that hedge funds in the highest Downside Returns quintile, outperform funds in the lowest quintile, by 5%, in the subsequent year, whereas funds with better Upside Returns do not outperform subsequently.