Performance Persistence and the Source of Returns for Hedge Funds

Abstract:     
This paper tests whether performance persistence exists in the hedge fund industry in the sense that some funds have consistently higher returns than others. Several procedures are used to determine if performance persists. The results show that performance persists in hedge funds with some funds showing the greatest persistence across all the procedures. The results also indicate a strong negative relation between hedge fund capitalization and returns. The results are consistent with the hypothesis that hedge fund managers exploit market inefficiencies.

Number of Pages in PDF File: 33

Keywords: hedge funds, performance persistence, style analysis, overlapping data

JEL Classification: G13

working papers series