Decreasing Returns to Scale has Eroded Hedge Fund Performance Persistence

Critical Finance Review, Forthcoming

57 Pages Posted: 6 Nov 2023 Last revised: 17 May 2024

See all articles by Nicolas P. B. Bollen

Nicolas P. B. Bollen

Vanderbilt University - Finance

Juha Joenväärä

Aalto University School of Business

Mikko Kauppila

University of Oulu

Date Written: October 9, 2023

Abstract

This paper successfully replicates Kosowski, Naik, and Teo (2007) and Jagannathan, Malakhov, and Novikov (2010), two seminal studies of hedge fund performance persistence. We show that top funds continue to add value in a more recent sample, even when using novel “real-time” data that approximates an investor’s actual information set. Persistence has substantially weakened, however, and is only observed when using Kosowski et al.’s Bayesian alpha to predict performance. We identify the econometric source of the superiority of Kosowski et al.’s methodology and show that the decline in performance persistence is associated with decreasing returns to scale for superior funds.

Keywords: performance persistence, decreasing returns to scale, replication, hedge funds

JEL Classification: G11, G23

Suggested Citation

Bollen, Nicolas P.B. and Joenvaara, Juha and Kauppila, Mikko, Decreasing Returns to Scale has Eroded Hedge Fund Performance Persistence (October 9, 2023). Critical Finance Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4596230 or http://dx.doi.org/10.2139/ssrn.4596230

Nicolas P.B. Bollen (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Juha Joenvaara

Aalto University School of Business ( email )

Finland

Mikko Kauppila

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

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