The Performance Persistence of Equity Long/Short Hedge Funds
Swiss Institute of Banking and Finance
Markus M. Schmid
University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - SoF: School of Finance
October 31, 2008
This paper examines the persistence of raw and risk-adjusted returns for equity long/short hedge funds using the portfolio approach of Hendricks, Patel, and Zeckhauser (1993). Only limited evidence of persistence is found for raw returns. Funds with the highest raw returns last year continue to outperform over the subsequent year, although not significantly, while there is no persistence in returns beyond one year. In contrast, we find performance persistence based on risk-adjusted return measures such as the Sharpe Ratio and in particular 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 one year except for the worst performers. Funds with significant risk-adjusted returns show less exposure to the market, have high raw returns, and low volatility. These results are robust to adjustments for stale prices and subperiod analysis.
Number of Pages in PDF File: 26
Keywords: Performance persistence, Hedge funds, Equity long/short, Multifactor models
JEL Classification: G11, G12working papers series
Date posted: July 22, 2008 ; Last revised: June 15, 2013
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