Which Hedge Fund Managers Deliver in a Crisis? Assessing Performance When Returns are Skewed

Abstract

: 92 percent of hedge funds in the TASS database exhibit significantly skewed returns. The alphas the managers of these funds earn are difficult to estimate accurately with OLS, especially in times of crisis. An alternative, the Residual Augmented Least Squares (RALS) estimator, is robust with respect to skewness. We demonstrate that the OLS performance assessment error relative to RALS depends systematically upon the sign of skewness in a fund’s returns and is economically significant. Furthermore, portfolios formed on RALS alphas persist more than those formed on OLS alphas and the performance persistence is concentrated in crisis periods.

Keywords: Hedge funds, Skewness, RALS, Factor models