Hedge Funds: Ability Persistence and Style Bias

20 Pages Posted: 16 Oct 2007 Last revised: 12 Nov 2008

See all articles by Marco A. Navone

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Matteo Belleri

Schroders Italy SIM

Date Written: May 1, 2007

Abstract

In this paper we analyze the persistence of the ability of hedge fund managers. Using a database of 3627 hedge funds from 1994 to 2004 we demonstrate that the ability does not persist for top performers once the strategy of the fund is correctly assessed. In order to do this we define as manager ability the difference between fund return and the return of a portfolio of hedge fund indices whose weights have been estimated minimizing the tracking error over the last 36 months. Our results are different from other contributions that measure the ability of the fund manager on the base of the investment strategy declared by the hedge fund. Using a consistent subsample of our data we demonstrate that this result is driven by a "style bias" that we define as the fact that the strategy of the fund is consistently different from the stated one.

Keywords: Hedge Funds, Selection Ability, Active Return

JEL Classification: G11, G14

Suggested Citation

Navone, Marco A. and Belleri, Matteo, Hedge Funds: Ability Persistence and Style Bias (May 1, 2007). Second Singapore International Conference on Finance 2008, Available at SSRN: https://ssrn.com/abstract=1021689 or http://dx.doi.org/10.2139/ssrn.1021689

Marco A. Navone (Contact Author)

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Matteo Belleri

Schroders Italy SIM ( email )

Via della Spiga 30
20121 Milano
Italy

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