Hedge Funds: Ability Persistence and Style Bias

28 Pages Posted: 21 Nov 2008 Last revised: 6 Apr 2015

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: July 31, 2008

Abstract

We analyze the persistence of the ability of hedge fund managers. Using a database of 3627 hedge funds from 1994 to 2005 we demonstrate that the ability does not persist for top performers once the strategy of the fund is correctly assessed. Manager ability is defined as the difference between fund return and the return of a portfolio of hedge fund indices whose weights have been estimated with a tracking error minimization. Our results are different from other contributions that measure the ability on the base of the investment strategy self reported in the fund prospectus. We demonstrate that the results of these previous contributions may be biased by a "style bias" that we define as the difference between the prospectus strategy and the one that best fits fund returns

Keywords: hedge funds, performance persistence, performance measurement

JEL Classification: G11, G14

Suggested Citation

Navone, Marco A. and Belleri, Matteo, Hedge Funds: Ability Persistence and Style Bias (July 31, 2008). CAREFIN Research Paper No. 8/08, Available at SSRN: https://ssrn.com/abstract=1305105

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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