Persistence in Hedge Fund Returns

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Do Hot Hands Exist Among Hedge Fund Managers?

RAVI JAGANNATHAN, ALEXEY MALAKHOV, and DMITRY NOVIKOV∗

Abstract
In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund’s performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. While we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds.