Persistence Analysis of Hedge Fund Returns

54 Pages Posted: 27 Apr 2010 Last revised: 8 Jun 2010

See all articles by Serge Patrick Amvella

Serge Patrick Amvella

HEC Montreal - Department of Finance

Iwan Meier

HEC Montreal - Department of Finance

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance

Date Written: April 26, 2010

Abstract

We use a Markov chain model to evaluate pure persistence in hedge fund returns. We study two forms of pure persistence: absolute persistence and persistence with respect to the high water mark, accounting for the size of drawdowns. We find that hedge funds in general exhibit persistence in positive returns, but not necessarily persistence in negative returns. We develop a new approach to account for serial correlation based on the method of moments and the model of Getmansky, Lo and Makarov (2004). Our approach overcomes the issue of discontinuity in the return distribution around zero identified by Bollen and Pool (2009).

Keywords: Hedge funds, Markov chain, smoothed returns, persistence, high water mark

JEL Classification: C13, G11, G23

Suggested Citation

Amvella, Serge Patrick and Meier, Iwan and Papageorgiou, Nicolas A., Persistence Analysis of Hedge Fund Returns (April 26, 2010). Available at SSRN: https://ssrn.com/abstract=1596244 or http://dx.doi.org/10.2139/ssrn.1596244

Serge Patrick Amvella (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Iwan Meier

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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