Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis

Posted: 19 Dec 2011

See all articles by Robert Kosowski

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance; Unigestion UK

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2007

Abstract

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Sorting on Bayesian alphas, relative to OLS alphas, yields a 5.5% per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust and relevant to investors as they are neither confined to small funds, nor driven by incubation bias, backfill bias, or serial correlation.

Keywords: Hedge fund performance, Persistence, Alpha, Factor models, Bayesian, Bootstrap

JEL Classification: G11, G12, G23

Suggested Citation

Kosowski, Robert and Naik, Narayan Y. and Teo, Melvyn, Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis (April 1, 2007). Journal of Financial Economics (JFE), Vol. 84, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1974581

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

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HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
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Unigestion UK

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Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
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+44 20 724 3317 (Fax)

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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