Best Ideas of Hedge Funds
34 Pages Posted: 12 Dec 2014 Last revised: 23 Jun 2015
Date Written: June 22, 2015
Abstract
We provide new compelling evidence that hedge funds possess investment skill. Using the longest-in-literature unbiased sample of hedge funds, we show that large holdings of past winners earn 7% annual benchmark-adjusted return. This remarkable performance is consistent with the notion that large holdings represent managers' best ideas. Our sample goes back to 1980 and does not miss non-surviving hedge funds, or those that do not voluntarily report to commercial databases. It consists of all investment managers that must report to the SEC, except those that we identify as managers other than hedge funds. While publicly available data is not sufficient to identify hedge funds directly, our "reverse identification" method achieves both high sensitivity and specificity. We also find weaker yet significant evidence of investment skill in standard indicators such as average fund performance and performance persistence.
Keywords: hedge fund, skill, bias, survivorship, self-reporting, 13F
JEL Classification: G23, G20, G14
Suggested Citation: Suggested Citation